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New VDI - Non Compliant Taxpayers Must Come Clean

6 Feb 2012

The IRS initiated its third Offshore Voluntary Disclosure Initiative ("OVDI") in January 2012. According to the IRS, it collected $3.4 billion from the first program in 2009, which corresponds to closures of about 95 percent of the open cases. Add to that another $1 billion from just the up-front payments received by IRS from the 2011 program and you can begin to appreciate why the IRS likes these programs so much. So why not give it another try? Just to make sure! Taxand US looks at the issue of VDIs and considers how the new initiative will affect Taxpayers.

Between the first two programs (2009 and 2011) the IRS received 33,000 voluntary disclosures and continued to receive enquiries and disclosures after closing the 2011 program. The IRS says that the new program addresses the continued interest of taxpayers and their tax practitioners to come clean before they find themselves under an IRS audit. Internal Revenue Service Commissioner Doug Shulman said "[a]s we've said all along, people need to come in and get right with us before we find you. We are following more leads and the risk for people who do not come in continues to increase."

Overview of New Program
The administrative and overall penalty structure of the new OVDI generally parallels the 2011 OVDI. For example, taxpayers eligible for the lower penalty rates (5 or 12.5 percent) will see no change in the rate. However, a notable deviation from the prior programs is that taxpayers in the highest penalty category will experience an increase in the rate from 25 to 27.5 percent of the highest aggregate balance in foreign bank accounts/entities or the value of foreign assets during the eight full tax years prior to the disclosure; perhaps, a subtle indication from the IRS that the clock is expiring on these reduced rates.

The 2012 OVDI participants must file all original and amended tax returns and include payment for back-taxes and interest for up to eight years, as well as pay accuracy-related and/or delinquency penalties. Unlike the prior initiatives, the reopened OVDI has no deadline and the IRS may terminate the program at its discretion. Any voluntarily disclosures made after the closure of the 2011 program, but prior to the announcement of the 2012 program, will be examined under the provisions of the new OVDI.

As under the prior programs, taxpayers who feel that the penalty is disproportionate may opt instead to be examined. Taxpayers must also file the corresponding Forms TD F 90-22.1, Report of Foreign Bank and Financial Accounts, for all undisclosed foreign accounts held by the taxpayer during the period covered by the program.

Taxand's Take

Many questions regarding the new OVDI remain unanswered, particularly with respect to dual citizens and other nonresidents who have been unaware of their U.S tax and information reporting obligations. The IRS is expected to issue more guidance on the new program in the upcoming months. Persons who find themselves in a non-compliant position with the IRS should weigh the risks and options associated with the new OVDI as they determine the best course of action.

Your Taxand contact for further queries is:

Juan Carlos Ferrucho
T. + 1 305 704 6670

Taxand's Take Author