By Edward Tanenbaum, Esq.
Alston & Bird LLP, New York, NY
With the January 1, 2013 effective date of the Foreign Account Tax Compliance Act (FATCA) quickly approaching, voluntary disclosures seem to be picking up again. With the looming FATCA disclosures, taxpayers are beginning to see an end to historical bank secrecy as we know it.
The two prior offshore voluntary disclosure programs (the 2009 OVDP and the 2011 OVDI, where the "I" stands for "Initiative") have officially ended but in January of 2012 the IRS announced a continuation of the 2011 OVDI with some changes. It has been reported that the IRS has collected over $5 billion in back taxes in the course of over 33,000 voluntary disclosures.
Just in time for the six-month push toward FATCA, the IRS, on June 26, 2012, revised its Frequently Asked Questions (FAQs), clarifying many uncertainties in the current OVDP, tightening some areas and relaxing others. In addition, the IRS released on June 28, 2012, updated versions of some of the documentation that taxpayers will be required to file as a part of their acceptance into the OVDP.
Notable clarifications include the fact that the OVDP is available to taxpayers who have both offshore and domestic issues that require disclosure (as were apparently the prior two programs). In addition, the IRS clarified which years are to be included or covered in the required eight-year voluntary disclosure period: for taxpayers who submit voluntary disclosures prior to the due date (generally April 15, 2012) or extended due date for 2011, the disclosure period includes 2003 - 2010. For taxpayers who submit disclosures after the due date or extended due date for 2011, the disclosure period is 2004 - 2011.
In terms of who is eligible to make a voluntary disclosure, the mere fact that the IRS has served a John Doe summons or made a treaty request does not make a person ineligible to make a voluntary disclosure, although once the IRS learns of a specific taxpayer's non-compliance, that person becomes ineligible under the OVDP.
However, the IRS added two new significant categories of persons ineligible for the OVDP. Under 18 USC §3506, a taxpayer is required to notify the U.S. Attorney General of any appeal or document submitted in connection with an appeal of a foreign tax administrator's decision to provide account information to the IRS. Under the OVDP, such a person who fails to provide the required notice will no longer be eligible to make a voluntary disclosure. Second, the IRS may announce that certain taxpayer groups that have or had accounts at specific financial institutions will be ineligible due to U.S. government actions in connection with the specific financial institutions. Each announcement is to provide notice of the prospective date upon which eligibility for the specific taxpayer group ends (posted on the IRS website).
In terms of revised documentation, the Offshore Voluntary Disclosure letter used to make the formal application to the OVDP has significantly changed and now has a required attachment/questionnaire which, to some extent, replaces an earlier document known as the Foreign Financial Institution Statement and further expands upon the details of the offshore account and the persons involved in the creation of the account. For example, the disclosure letter and the attached questionnaire now call for information regarding deposits/withdrawals, entities affiliated with the account, and a host of information relating to communications with representatives of the foreign financial institution. Clearly, the treasure trove for the IRS in the OVDP has been the information gleaned about professional advisors associated with the establishment and maintenance of offshore accounts.
Two taxpayer-favorable modifications have been made to the OVDP in response to situations involving U.S. citizens, including dual citizens, residing abroad. The first, specific to Canada, relates to the failure to have made a timely election under Article XVII(7) of the U.S.-Canada Income Tax Treaty to defer U.S. income tax on income earned in, but not yet distributed from, Canadian registered retirement savings plans (RRSPs) or registered retirement income funds (RRIFs). The IRS has now given affected persons the opportunity to request an extension of time to make the election (similar to §9100 relief which, in fact, had been applied for by a number of participants in the past disclosure programs but with uncertain outcomes) by providing information about events which led to the failure to make a timely election, events which led to the discovery of the failure, and about the nature of any professional advisor's engagement and responsibility. And the big ticket news is that if the election is granted, the RRSP or RRIF balance will not be included in the offshore penalty base upon which the 27.5% penalty attaches.
The second taxpayer-favorable modification also relates to U.S. citizens, including dual citizens, residing abroad, many of whom have apparently not been aware of their continuing tax reporting obligations to the United States.
The IRS announced a new procedure (to take effect September 1, 2012) that will allow these persons to become tax-compliant, without necessarily facing penalties, if they are low-compliance risk taxpayers who owe little or no back taxes (generally, those persons who have simple tax returns and owe $1,500 or less in tax for each of the covered years). Persons who fit these parameters will be required to file delinquent tax returns and information returns for the past three years and to file delinquent FBARs for the past six years. Persons who present higher compliance risks will not be eligible for this procedure and will be subject to a more detailed review and audit, possibly covering more than three years. The IRS has indicated, however, that this procedure does not provide protection from criminal prosecution (as does the official OVDP) nor is it available to those persons who are ineligible to participate in the OVDP. Unfortunately, there are a lot of uncertainties in the interpretation and applicability of the new procedure which, hopefully, will be resolved in forthcoming guidance.
To be sure, the IRS is continuing to reach out to non-compliant taxpayers with the hope of encouraging them to "get right with the IRS" and to come back into the system. A number of the recent clarifications and modifications are designed to do just that.
This commentary also will appear in the September 2012 issue of the Tax Management International Journal. For more information, in the Tax Management Portfolios, see Tello, 915 T.M., Payments Directed Outside the United States-Withholding and Reporting Provisions Under Chapters 3 and 4, and in Tax Practice Series, see ¶7170, U.S. International Withholding and Reporting Requirements.
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