“continuing to delay or ignore any catch up U.S. filings will only become more problematic.”
On January 9, 2012, in response to taxpayers continuing to come forward, the Internal Revenue Service (the I RS) reopened the offshore voluntary disclosure program which had expired on September 9, 2011. The program is primarily aimed at U.S. taxpayers who have failed to disclose offshore assets, and the related income, to the IRS.
There are two significant differences between the new 2012 program (the program) and the program that ended on September 9, 2011:
- The top penalty rate has increased from 25% to 27.5%; and
- There is no announced expiry date.
Taxpayers with smaller offshore assets or accounts (in general, accounts with a cumulative value not in excess of US $75,000) will still qualify for a reduced 12.5% penalty. In addition, taxpayers who have been fully compliant in their country of residence may also still qualify for the reduced 5% rate. These penalties are based on the highest aggregate value of the foreign assets over the eight year filing period that is required.
The IRS notes, however, that the terms of the program could be altered at any time. For example, the IRS may increase penalties in the program for all or some taxpayers or defined classes of taxpayers – or decide to end the program entirely at any point.
The program provides both good news and bad news. For taxpayers who have knowingly hidden assets offshore, it allows them to become compliant without the threat of criminal penalties. It should also be noted that for each program, the top penalty rate has increased – initially from 20% to 25% and now to 27.5%. If the program is ultimately modified, this trend will likely continue.
The bad news , however, is that the program still does not address the issue of innocent non-filers (though the IRS website does mention that taxpayers who believe the penalties are disproportionate may opt to file outside of the new program using a reasonable cause argument).
Innocent non-filers clearly have two options. They can file under the new program and pay a penalty of at least 5% of the value of their non-U.S. financial accounts. Alternatively, they can file under the reasonable cause standard and take solace in the recently published IRS Fact Sheet (FS-2011-13) which indicates that penalties may be abated if the taxpayer can demonstrate a reasonable cause as to why returns have not been timely filed.
It is becoming clear that continuing to delay or ignore any catch up U.S. filings will only become more problematic. With all the information regarding US filing requirements that has been publicized over the last number of years, it may become more difficult for a US person to argue that they did not know of their obligations and, therefore, had a reasonable cause for not filing.
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The material provided in Tax Tip of the Week is believed to be accurate and reliable as of the date it is written. Tax laws are complex and are subject to frequent change. Professional advice should always be sought before implementing any tax planning arrangements. Neither the Tax Specialist Group nor any member firm can accept any liability for the tax consequences that may result from acting based on the contents hereof.