Voluntary Offshore Disclosure Program, Round Three

The IRS has had a major focus on finding and penalizing taxpayers who have foreign financial accounts and who have not made proper disclosure of those accounts and have not paid U.S. income tax on earnings in those accounts.  Two temporary, voluntary disclosure programs in 2009 and 2011 were established to encourage delinquent taxpayers to come forward and clear up the matter.  About 33,000 disclosures were made and $4.4 billion was collected.  The new program started in January 2012 and has no end date.  However, the IRS cautions that it could end or modify the program at any time, and so taxpayers should come forward expeditiously.  The IRS also warns of severe civil (criminal penalties are also a possibility) penalties if they find a taxpayer with delinquent foreign accounts before such taxpayer makes a voluntary disclosure.  The IRS also states that "quiet disclosures," whereby taxpayers amend past tax returns to disclose foreign financial accounts and pay back taxes, will not avoid the full extent of penalties that the IRS will assert if the quiet disclosure is discovered.  Taxpayers must come under the new voluntary disclosure program to reduce penalties.

The new program is not inexpensive.  The program requires up to eight years of corrected back tax returns, with added taxes, interest, and the addition of the accuracy-related and/or delinquency penalty.  In addition, the taxpayer must pay a penalty of 27.5% of the highest aggregate balance in foreign financial accounts during the eight full years prior to the date of disclosure.  This is an increase from the 25% penalty under the 2011 program.  The penalty might be reduced to 12.5% if foreign accounts and assets total $75,000 or less.  There is also a penalty reduction to 5% for certain restrictive situations.

Taxpayers who have yet to make full disclosure of their foreign accounts and to pay U.S. income tax on foreign earnings should use this program to come clean.  The risks of coming clean with quiet disclosure in order to avoid the settlement penalties are too high.  More information about the program can be found on the IRS website at http://www.irs.gov/newsroom/article/0,,id=252162,00.html.