IRS Reopens Offshore Voluntary Disclosure Program and Increases Top Penalty

The IRS has reopened the offshore voluntary disclosure program, which closed in 2011, to encourage taxpayers to disclose unreported foreign accounts. The revived program is open-ended, but the IRS reserved the right to change the terms of the program at any time going forward (IRS News Release 2012-5). Additional details will be posted on the IRS website, the IRS advised.

Comment

IRS Commissioner Douglas Shulman announced the reopening of the offshore voluntary disclosure program by lauding the success of past programs. Shulman reported that the IRS has collected $4.4 billion from the 2009 and 2011 programs. Shulman predicted the IRS will collect additional revenue from the 2011 program as it processes cases.

The reopened program is similar to the 2011 program, but there are some differences. The overall penalty framework requires individuals to pay a penalty of 27.5 percent of the highest aggregate balance in foreign bank accounts/entities or value of foreign assets during the eight full tax years prior to disclosure.

The 2011 program imposed a penalty of 25 percent. Unchanged from the 2011 program are reduced penalties of 12.5 percent and five percent for qualified taxpayers, the IRS explained. Individuals who have made voluntary disclosures after the 2011 program ended will be able to be treated under the provisions of the revived program.

The 2009 and 2011 programs were temporary and required taxpayers to request to participate by certain deadlines. The reopened program has no set deadline. However, the terms of the revived program could change at any point, the IRS cautioned. The IRS indicated it could increase penalties in the program for all, or some, taxpayers or defined classes of taxpayers; or, it could decide to end the revived program entirely.

Comment

Shulman reported that the 2009 and 2011 programs have generated 33,000 voluntary disclosures to date.

In related news, the National Taxpayer Advocate recently has ordered the IRS Large Business & International and Small Business/Self-Employed Divisions in a Taxpayer Assistance Directive (TAD) to revoke a memorandum issued on March 1, 2011, to examiners of open cases in the 2009 offshore voluntary disclosure program. The memorandum directs examiners in certain listed categories of cases to stop using their discretion to determine whether to propose an offshore penalty less than 20 percent.

Comment

According to the National Taxpayer Advocate, the IRS materially changed the terms of the 2009 offshore voluntary disclosure program after taxpayers, who relied on the original terms, applied for it. This resulted in the IRS treating similarly situated taxpayers differently.

Reference: PTE §39,015.15