IRS Re-Opens the Offshore Voluntary Disclosure Program

by Julie R Butler

On January 9, the IRS re-opened its Offshore Voluntary Disclosure Program (OVDP), offering a reduced penalty framework to encourage taxpayers with overseas accounts who have been delinquent in their tax reporting to fully disclose their accounts and come back into tax compliance. According to the IRS news release, IR-2012-5, “This program will be open for an indefinite period until otherwise announced.”
The IRS has instituted two similar programs in the past, one in 2009 and another in 2011. This time around, there is no deadline for applying. The catch is that the IRS reserves the right to change the terms of the program at any time, meaning they could increase the penalties or decide to terminate the program.  A thin line is being treaded between enticing delinquent taxpayers to straighten out their tax situation and being sure to penalize them more than those who have come forward in the past, thereby effectively rewarding those who delayed coming into compliance.Individuals in the highest penalty category will have to pay more, with the penalty going up to 27.5% from 25% for those who participated in the 2011 program, while the penalties for the participants with smaller offshore accounts (not exceeding $75,000 in any calendar year during the past eight years) and those who can prove that they entered the program in order to correct honest mistakes will remain the same as in the past, at 12.5% and 5%, respectively. Also as in the past, the IRS states, all participants will be paying back-taxes and interest for up to eight years in addition to the penalties, and anyone who believes that they have been placed in the wrong penalty category can opt out, which is an irrevocable move that results in standard audit procedures and high penalties being imposed. It seems that this new program was initiated in a surprise move after the IRS had indicated, according to a 2011 tax year-in-review by the tax and accounting information service, CCH Group, “that there will not be a third disclosure initiative anytime in the near future.”It could very well be because of Nina E. Olson of the Taxpayer Advocate Service (TAS), a government-mandated independent office within the IRS, who has challenged the IRS, alleging unfair treatment of participants in the 2009 OVDP. At issue is that last part mentioned above, about being in the wrong penalty category and choosing to opt out. The IRS had been accused by taxpayers of pulling the ol’ “bait and switch,” and the TAS charged that a policy change that occurred in 2011 goes against an earlier statement by the IRS ensuring that “under no circumstances will a taxpayer be required to pay a penalty greater than what he would otherwise be liable for under existing statutes.”You can read all the ins and outs of the situation involving “FAQ #35,” “secret” internal memos, and a severe lack of clarity here, but I will distill the story down to the essential details: “[T]his resulted in inequitable treatment of taxpayers, in that it fails to distinguish between true tax evaders and those who made honest mistakes.”In September 2011, the TAS had this to say:

Accordingly, we believe the IRS should create a fair process to evaluate willfulness, reasonable cause, etc. within the OVDP, with the proper burden of proof (on the IRS) as the public understood it to be doing at the outset. Under that approach, the IRS will still have succeeded in bringing the accounts into the open, and collecting all back tax and interest and most penalties. The alternative, which is akin to a “guilty until proven innocent” approach, is not a good one for an agency of the United States government to follow.

A decision is now in the hands of IRS Commissioner Douglas H. Shulman, and lo and behold, the IRS suddenly announces its new OVDP, with the concluding paragraphs stating this:

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.

While the OVDP was listed in National Taxpayer Advocate Olson’s annual report to Congress as one of the “Most Serious Problems,” educating taxpayers of their rights and responsibilities was a major focus of her report.Clarity was another major focus, one that the IRS has a big problem with, stretching from convoluted tax reporting requirements and confusion caused by the increasing use of refundable tax credits, to uncertainly about how the new Foreign Account Tax Compliance Act (FATCA) requirements will work in the complex world of international finance and this whole mess with the OVDP, which has come about because the penalties for not complying with the Foreign Bank and Finance Reporting regulations (FBAR) – even when one owes no taxes whatsoever – are so stiff and the information for expats and others who are affected so fleeting.Let’s hope that this new voluntary disclosure program, along with the release in mid-December of guidance on new rules for FBAR, are a new trend in responsiveness and a softening of the IRS' image, as the FBAR guidance came on the heels of an angry open letter to the editors of major US newspapers by Canadian Finance Minister Jim Flaherty expressing concerns about the effects of FBAR on honest, hard-working dual citizens of the U.S. and Canada. Here again, the possibility was opened up that citizens could prove that they were delinquent on their reporting because of honest mistakes.If this is a trend, then it is some greatly needed good news, indeed.Julie R Butler is a traveler, blogger, freelance writer, and editor who has authored several books, self-published as eBooks, including Nine Months In Uruguay and No Stranger To Strange Lands (click here for more info). To contact Julie about writing or editing work, email: julierbutler [at] yahoo.com.See more Expat articles by Julie at

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