NEWSFLASH - 9-Jan-2012: 

 +++ Offshore Voluntary Disclosure 
 Program Reopens +++ 

 +++ More details will be available within the next month on IRS.gov. In addition, the IRS will be updating key Frequently Asked Questions and providing additional specifics on the offshore program. +++ 

Tax amnesty through
Voluntary Disclosure Agreements ("VDA")

Tax Amnesty in 2012 and 2011

The 2011 Offshore Voluntary Disclosure Initiative ("OVDI") is closed. As we had predicted in October 2011, the Internal Revenue Service ("IRS") announced a 2012 Offshore Voluntary Disclosure Program. Bowing to pressure from Canadian dual citizen and from Canadian government officials the IRS rushed to announce the program on January 9, 2012 with the promise to address details later. At this point, the reopened program appears to be only one remaining option to avoid or alleviate criminal prosecution or enormous penalties.

Doing nothing is no longer an option. When the IRS finds out, it is too late, and given the tools of the Internal Revenue Service ("IRS") and US law enforcement agencies, discovery is a distinct possibility. Tax Information Exchange ("TIE") Agreements, Mutual Legal Assistance Treaties ("MLATs"), and Qualified Intermediary ("QI") Agreements with foreign banks erode offshore secrecy.

One segment of taxpayers may hope to expect a less harsh treatment under details of the reopened program, possibly even a complete amnesty: the Americans and Green Card Holders abroad ("Expatriates"). There are more than five million Americans living abroad and another 39 million immigrants in the U.S. (who face similar issues with overseas disclosure if they have accounts back home). Nonetheless, the Treasury Inspector General for Tax Administration reported for 2009 only 534,043 FBAR filings. In attempt to appease the large number of Americans living in Canada as well as Canadian government officials the IRS on December 9, 2011 hastily issued Fact Sheet FS-2011-13, December 2011 Information for U.S. Citizens or Dual Citizens Residing Outside the U.S. with the assurance to continue considering the topics and to provide additional information as it becomes available.

The Expatriate Action Plan

Expatriates' Dilemma

The Expatriates´ Problem

The Government requires all Americans and all Green Card Holders abroad ("Expatriates") to file annual U.S. Tax Returns and other reports even if no income tax is due. In the past, the majority of the expatriate community has disregarded this obligation, often only because no competent advice is available locally.

In recent years the government has expanded the tax filing requirements culminating in the reporting for foreign bank accounts (FBAR) and, starting in 2011, the reporting of foreign financial assets within the tax return, Form 8938. The Government does not differentiate between taxpayers in the U.S. and expatriates, neither for reporting nor for the imposition of penalties. For additional information please visit the "Increasing Foreign Compliance" section.

Within the 2011 Offshore Voluntary Disclosure Initiative ("OVDI") the Government explicitly warned not to attempt quiet disclosures by filing amended returns when reporting increases in income. "The IRS will closely review these returns to determine whether enforcement action is appropriate. ... When criminal behavior is evident and the disclosure does not meet the requirements of a voluntary disclosure under IRM 9.5.11.9, the IRS may recommend criminal prosecution to the Department of Justice." (FBAR FAQ Q&A 16 )

If all expatriates who file first time or amended returns reporting increases in income would follow the directive and would file only under the voluntary disclosure rules, the voluntary disclosure process would come to a standstill under the sheer volume of filings.

The Expatriates' Solution

There is hope and possibly a solution.

Game Theory would dictate a solution which allocates for rational players marginal positions through the phenomenon of ubiquity, scarcity and relativity of marginal positions in social groupings (Grewe, Günther - Games for Criminal Status: Justice as Order through Structured Social Inequality, Lang, 1979. Political processes will eventually gravitate to such a solution, but this may take time. In some way, the Expatriates´ Dilemma is the sociology version of the Prisoners´ Dilemma: "But what If there were not enough prisons?"

While game theory does not dictate political processes, examples of solutions by other institutions may accelerate them. Borne from the need for hard cash the States in recent years have chosen a pragmatic approach. In our daily practice, we noted that States have standardized the Voluntary Disclosure Agreements process, bringing a vast number of business taxpayers with nexus back into the fold and resulting in filled coffers for those States.

Perhaps the example of what States have been doing with great success will encourage the Federal Government to satisfy its dire need for cash through a similar approach to its expatriates. This process may already have started. On November 4, 2011 the IRS has opened a Helpline for FBAR and Title 31 questions for practitioners and taxpayers.

The Expatriate Action Plan

Until rationality works itself through the political process, we recommend the following steps:

• UNDER ATTORNEY-CLIENT PRIVILEGE prepare but do not yet file all delinquent tax returns and other reports.
• On or before June 15, 2012, the next due date for 2011 tax returns and reports for expatriates, start the Voluntary Disclosure Agreement process or any process which may have been put into place by then.
• Depending on the individual risk preference and the subjective risk assessment of discovery the Voluntary Disclosure Agreement process may be started immediately. When the Government institutes a more rational approach to the taxation and the reporting by expatriates, they most likely will grant the same conditions to taxpayers who have come forward before. The downside risk, then, is limited to the cost of filing under existing rules
  
  
  

 +++ Offshore Voluntary Disclosure 
 Program Reopens +++ 

IR-2012-5, Jan. 9, 2012 - WASHINGTON - The Internal Revenue Service today reopened the offshore voluntary disclosure program to help people hiding offshore accounts get current with their taxes and announced the collection of more than $4.4 billion so far from the two previous international programs.

The IRS reopened the Offshore Voluntary Disclosure Program (OVDP) following continued strong interest from taxpayers and tax practitioners after the closure of the 2011 and 2009 programs. The third offshore program comes as the IRS continues working on a wide range of international tax issues and follows ongoing efforts with the Justice Department to pursue criminal prosecution of international tax evasion. This program will be open for an indefinite period until otherwise announced.

"Our focus on offshore tax evasion continues to produce strong, substantial results for the nation's taxpayers," said IRS Commissioner Doug Shulman. "We have billions of dollars in hand from our previous efforts, and we have more people wanting to come in and get right with the government. This new program makes good sense for taxpayers still hiding assets overseas and for the nation's tax system."

The program is similar to the 2011 program in many ways, but with a few key differences. Unlike last year, there is no set deadline for people to apply. However, the terms of the program could change at any time going forward. 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.

"As we've said all along, people need to come in and get right with us before we find you," Shulman said. "We are following more leads and the risk for people who do not come in continues to increase."

The third offshore effort comes as Shulman also announced today the IRS has collected $3.4 billion so far from people who participated in the 2009 offshore program, reflecting closures of about 95 percent of the cases from the 2009 program. On top of that, the IRS has collected an additional $1 billion from up front payments required under the 2011 program. That number will grow as the IRS processes the 2011 cases.

In all, the IRS has seen 33,000 voluntary disclosures from the 2009 and 2011 offshore initiatives. Since the 2011 program closed last September, hundreds of taxpayers have come forward to make voluntary disclosures. Those who have come in since the 2011 program closed last year will be able to be treated under the provisions of the new OVDP program.

The overall penalty structure for the new program is the same for 2011, except for taxpayers in the highest penalty category.

For the new program, the penalty framework requires individuals to pay a penalty of 27.5 percent of the highest aggregate balance in foreign bank accounts/entities or value of foreign assets during the eight full tax years prior to the disclosure. That is up from 25 percent in the 2011 program. Some taxpayers will be eligible for 5 or 12.5 percent penalties; these remain the same in the new program as in 2011.

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 paying accuracy-related and/or delinquency penalties.

Participants face a 27.5 percent penalty, but taxpayers in limited situations can qualify for a 5 percent penalty. Smaller offshore accounts will face a 12.5 percent penalty. People whose offshore accounts or assets did not surpass $75,000 in any calendar year covered by the new OVDP will qualify for this lower rate. As under the prior programs, taxpayers who feel that the penalty is disproportionate may opt instead to be examined.

The IRS recognizes that its success in offshore enforcement and in the disclosure programs has raised awareness related to tax filing obligations. This includes awareness by dual citizens and others who may be delinquent in filing, but owe no U.S. tax. The IRS is currently developing procedures by which these taxpayers may come into compliance with U.S. tax law. The IRS is also committed to educating all taxpayers so that they understand their U.S. tax responsibilities.

More details will be available within the next month on IRS.gov. In addition, the IRS will be updating key Frequently Asked Questions and providing additional specifics on the offshore program.