Earlier this year, the Internal Revenue Service (IRS) reopened the Offshore Voluntary Disclosure Program (OVDP) to taxpayers with undisclosed income from offshore accounts in order to get them into compliance and current on their tax returns. The IRS has collected over $4 billion from prior programs in 2009 and 2011 (the 2011 program closed last September, and those who came in after the program closed will be treated under the 2012 OVDP program). So far, the IRS has received over 33,000 voluntary disclosures from the offshore initiatives.
The penalty structure of the 2012 OVDP is similar to the 2011 program; generally, the key elements include:
- Filing original and amended tax returns, offshore-related information returns and Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (FBAR), for up to eight tax years prior to the disclosure.
- Paying tax on the deficiency, plus interest for up to eight years, as well as a 20% accuracy-related penalty and any delinquency penalties.
- Paying an offshore penalty in lieu of all other penalties that may apply, including FBAR and information return penalties.
For the 2012 OVDP program, the offshore penalty would be equal to 27.5% of the highest aggregate balance in foreign bank accounts or value of foreign assets during the eight full tax years prior to the disclosure (up from a 25% offshore penalty for 2011). Smaller offshore accounts less than $75,000 in each of the years covered by the OVDP would face a 12.5% offshore penalty, or a 5% penalty for limited situations involving de minimis contact. The latest OVDP program is open for an indefinite period until the IRS announces otherwise.1
Additional Guidance Expected
The IRS is aware of circumstances where the application of the OVDP may appear to be too severe given the facts of the case, prompting a taxpayer to consider opting-out of the OVDP and undergoing an examination. Last year, the IRS provided guidance on the opt-out option, clarifying that an opt-out may reflect a preferred approach and a taxpayer opting out of OVDP should not be treated in a negative fashion.2
It is welcome news that for the 2012 OVDP, the IRS is developing new procedures for dual citizen taxpayers.3 For example, a dual citizen may be delinquent in filing, but owe no U.S. tax. Additionally, due to reasonable cause or mitigating factors in the case of a violation, the IRS might determine that an FBAR penalty does not apply. In fact, the IRS has provided information for U.S. citizens or dual residents residing outside the U.S. about FBAR filing requirements and FBAR penalties not being imposed when the IRS determines that the failure to file is due to reasonable cause.4
Importantly, under the OVDP program, IRS Examiners do not have discretion to settle cases. While taxpayers are not required to pay a penalty under OVDP greater than what they would otherwise be liable for under existing law, in practice, the IRS examiner will compare the amount due under the OVDP to the tax, interest and applicable penalties without regard to reasonable cause.5
The opt-out provision in the OVDP program appears to offer limited wiggle room.
“A potential bright spot in the OVDP program is the opt-out provision. The threat of a full, normal examination would be coupled with full, normal appeal rights. This is an option which definitely should be considered.”
–Jim Casimir, Founding Partner, Casimir Consulting
We will keep you posted about additional specifics on the 2012 OVDP, along with updates to the Frequently Asked Questions, expected from the IRS in the near future.
Comparison Chart Now Available On Offshore Reporting Requirements
A May 2012 IRS Issue Management Resolution System report includes a comparison chart of the new Form 8938, Statement of Specified Foreign Financial Assets, and Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (FBAR).6
Under the Foreign Account Tax Compliance Act (FATCA), U.S. individuals with foreign financial assets at a $50,000 threshold must report those assets to the IRS. This reporting is made on Form 8938, which taxpayers attach to their federal income tax return, beginning with the 2011 tax return. U.S. individuals with an interest in foreign financial accounts at a $10,000 threshold any time during the calendar year are required to file an FBAR.
Note that the Form 8938 filing requirement does not replace a taxpayer’s obligation to file an FBAR, and individuals should file each form for which they meet the reporting threshold. The chart is an excellent resource and gives a detailed breakdown of frequently asked questions. Also, the IRS is holding a public hearing on May 15th to hear comments on the proposed FATCA regulations, which were released in February 2012, and we are closely following developments.
Tax Legislation Outlook
After the November Presidential and Congressional elections, the U.S. Congress is expected to convene a Lame Duck session to address the expiration of stimulus measures, George W. Bush’s tax cuts and tax extenders. The Capitol Hill tax press is referring to this convergence as “Taxmageddon.” If Congress does nothing, tax rates will increase on ordinary income, capital gains and dividends.
On top of it all, in January 2013, mandatory budget cuts in domestic and defense spending may take effect, a process called sequestration. With such a crowded legislative agenda for November and December this year, Congress may not be able to complete all of its priorities by December 31st. The speculation is that Congress may enact a framework for a deficit plan that might include some new revenue, extend some or all of the Bush tax cuts and delay a sequestration. Depending on the outcome of the elections, everything could very well carry over to the 113th Congress. These are important considerations to take into account for resolving any tax disputes in 2012.
For additional information, please contact Jim Casimir at jim.casimir@casimirconsulting.com or Tom Louthan at tom.louthan@casimirconsulting.com
1 IRS News Release, IR-2012-5, January 9, 2012, http://www.irs.gov/newsroom/article/0,,id=252162,00.html
2IRS Opt Out and Removal Guide, http://www.irs.gov/pub/newsroom/2011ovdi_opt_out_and_removal_guide_and_memo_june1_2011.pdf
3IRS News Release, IR-2012-5, supra note 1.
4IRS Fact Sheet 2011-13, December 2011, http://www.irs.gov/newsroom/article/0,,id=250788,00.html
5IRS Frequently Asked Questions and Answers, FAQ 50: http://www.irs.gov/businesses/international/article/0,,id=235699,00.html
6IRS Issue Management Resolution System, Hot Issues report, May 2012, http://www.irs.gov/businesses/article/0,,id=255986,00.html
Jim Casimir, Founding Partner of Casimir Consulting, has announced that Steven P. Onken has joined the firm as a consultant.
Steve had a 37-year career at IRS, including over 30 years in Appeals. He had Compliance experience as an Office Auditor before moving to District Conference Staff. He was a Revenue Agent in the field and in Quality Review Staff. He moved to Appeals in 1980 and has a solid technical background from working a wide range of cases in over 20 years as an Appeals Officer.
Steve is an expert on practice and procedures for coordination of Appeals issues. As a Team Manager in Appeals Technical Guidance, he managed subject matter experts responsible for national coordination and settlement of numerous corporate and individual structured transactions. He also specialized in penalties on tax return preparers and promoters, reporting foreign bank and financial accounts and reportable transactions.
As the Area Director of Appeals International, Steve managed a staff that had responsibility for coordination and resolution of all international issues within IRS Appeals. Steve was also instrumental in developing new Alternative Dispute Resolution Programs and is a trained mediator.
Steve is a seasoned specialist who focuses on efficient dispute resolution and collaborative problem solving. He has degrees in Economics and Human Relations from the University of Minnesota and is a Certified Public Accountant.
Steve can be reached at Steve.Onken@CasimirConsulting.com.
Tom Louthan and Jim Casimir are planning to meet with clients and representatives in London, Paris, and Zurich, March 28 through April 6. We are planning a second visit beginning May 20 to London and Rome.
Our emphasis will be on unsolvable dilemmas with the IRS and the Service’s current version of “Offshore Voluntary Disclosure Initiative”.
If you have time for lunch or tea, write me at jim.casimir@casimirconsulting.com
If you decide to appeal the findings of the IRS examiner, here’s what you should expect.
It takes LMSB many weeks to transmit the file to the appropriate Appeals Office. At the time of filing the protest, you can request an office that is convenient to you!
When received in Appeals, the office guideline calls for your request for a hearing be acknowledged within 60 days. At the end of the third quarter of 2011, Appeals had 148,327 assigned cases. Is it any wonder it takes a while to get to your case?
Use the time wisely. Only once in my career have I received this call, “We have reviewed your most complete and articulate protest, and the Government concedes.” The other 99.9% of the time you will receive a letter or call to schedule your first appointment.
Use the interim time to prepare. If for some reason you were not able to present all the facts to the Agent, now is the time to add to the presentation.
Start considering a reasonable settlement. You should have one that doesn’t kill you and your business while at the same time the Appeals Officer can look at and say, “That’s seems fair to the government”.
National Chief of Appeals Chris Wagner is fighting hard to reduce the cases in inventory. Let’s see what we can do to help him.
Jim Casimir, Founding Partner of Casimir Consulting, has announced that Thomas C. Louthan has joined the firm as a consultant and Director.
While Director of Alternative Dispute Resolution Programs at the IRS, Tom pioneered mediation and arbitration programs for IRS Appeals to resolve tax disputes without litigation. He also founded the IRS Appeals international program and directed a nationwide network of Appeals International Specialists.
As Director, Strategic Planning & Communications, Tom was responsible for the IRS Appeals organization’s strategic plans. At the U.S. Senate Finance Committee, Tom was a Legislative Fellow with Chairman Max Baucus, D-Mont, and the Government Affairs Institute, Georgetown University. He was responsible for IRS tax administration legislative initiatives including voluntary compliance for Examination, Collection, and Appeals. Tom is an expert on proposals to reform the U.S. international tax system.
Tom earned a Legislative Certificate from Georgetown University, Government Affairs Institute and a Juris Doctor degree from Widener University School of Law; he is admitted to the New York Bar. He has published numerous articles on alternative dispute resolution in a number of prominent tax publications. Tom’s specialty at Casimir Consulting is finding simple solutions to complex situations.