IRS Offshore Voluntary Disclosure Program: IRS Launches Third Offshore Voluntary Disclosure Program

Sullivan & Cromwell LLP - January 10, 2012

On January 9, 2012, the Internal Revenue Service (the “IRS”) issued a news release announcing that the IRS is opening a third Offshore Voluntary Disclosure Program (the “OVDP”) for taxpayers that come forward to report previously undisclosed foreign accounts, assets and income. The program is similar in structure to the recently closed 2011 Offshore Voluntary Disclosure Initiative (the “2011 OVDI”), but unlike the previous program, there is no set deadline for taxpayers to apply for the new program. Taxpayers coming forward under the OVDP will pay penalties under the 2011 OVDI structure, but taxpayers in the highest penalty category will face penalties of 27.5 percent, rather than 25 percent as under the 2011 OVDI. Taxpayers who applied for the 2011 OVDI after that program closed will be handled under the provisions of the new OVDP.

As under the previous offshore disclosure programs, the OVDP provides an opportunity for taxpayers to disclose unreported foreign accounts, assets and income with fewer penalties than might be applied without the program, while avoiding criminal prosecution. Previous offshore disclosure programs have also provided amnesty for taxpayers without unreported income that are delinquent in filing of Reports of Foreign Bank and Financial Accounts (“FBARs”) and information returns with regard to controlled foreign corporations or foreign trusts, and it appears the OVDP will also offer this amnesty. Further information and updated Frequently Asked Questions (“FAQs”) will soon be made available on the IRS website. The IRS news release further states that its voluntary disclosure programs and success in offshore enforcement have increased awareness of U.S. tax filing obligations, including awareness by dual citizens and others “who may be delinquent in filing, but owe no U.S. tax.” Accordingly, the IRS is currently developing procedures by which these taxpayers may come into compliance with U.S. tax law.