In January, 2012 the IRS began their third Offshore Voluntary Disclosure Program (OVDP); the two prior initiatives (2009 OVDP, which ran from 3/23/09 through 10/15/09, and 2011 OVDI which ran from 2/8/11 through 9/9/11). The OVDP was established to encourage taxpayers to disclose previously undisclosed foreign offshore accounts, and undisclosed income from offshore accounts. U.S. taxpayers were given the opportunity to get current on their tax returns and avoid detection by the IRS under audits (with civil tax fraud and criminal tax evasion implications).
Unlike the 2009 OVDP and the 2011 OVDI, there is no set deadline for taxpayers to apply. The terms of the OVDP program could change at any time going forward. The IRS may increase penalties, limit eligibility or end the program entirely.
According to the IRS, taxpayers with undisclosed foreign accounts should make a voluntary disclosure:
1. To become tax compliant;
2. Avoid civil penalties for fraud and foreign information return penalties;
3. Avoid increased risk of criminal prosecution.
The IRS is actively engaged in pursuing U.S. taxpayers with undisclosed foreign accounts. The IRS is receiving information about the identities of U.S. taxpayers with foreign accounts under tax treaties (with foreign governments), submission by whistleblowers, and foreign government disclosure under the Foreign Account Tax Compliance Act (FATCA) and Foreign Finances/Asset Reporting (new IRC Sec. 6038D). Currently the IRS has signed 7 intergovernmental agreements and is negotiating over 40 more agreements with different governments.
The IRS/OVDP (2012) is fraught with peril. Taxpayers who disclose their homes, taxpayer identification numbers, undisclosed foreign offshore bank accounts, and unreported offshore income are not given immunity from prosecution. If for any reason the IRS rejects their offer, they face potential civil fraud and criminal tax evasion prosecution (as in the recent 3/13 case of Israel’s Bank Leumi).
In addition, U.S. taxpayers must file amended Form 1040(x), federal income tax returns (and state tax returns) for the voluntary disclosure period, which is the most recent 8 tax years for which the due date has already passed.