The IRS is preparing to announce a new Voluntary Disclosure ('VD') program aimed at non-compliant US taxpayers with unreported offshore accounts. The possibility was first raised in December by IRS Commissioner Douglas Shulman and confirmed last week by IRS Deputy Commissioner Steven Miller.
The new VD program would borrow heavily on the terms offered in 2009 under which taxpayers were able to come clean with the IRS to mitigate the risk of criminal prosecution in exchange for paying taxes, interest and a standardized penalty.
Nearly 15,000 voluntary disclosures were made pursuant to the 2009 program. The IRS has reported that another 3,000 disclosures have been made since October 2009, and it appears that those individuals will be processed under the terms of the pending VD program, along with those who come forward currently.
Commissioner Shulman confirmed that the IRS is using information obtained in the initial VD program to develop 'new leads, involving numerous banks, advisors and promoters from around the world, including Asia and the Middle East' and further indicated that the new Foreign Account Tax Compliance Act ('FATCA') legislation 'makes the world a riskier place for U.S. taxpayers still trying to hide their money anywhere around the world'.
FATCA requires so-called 'foreign financial institutions' ('FFIs') that invest in the US to either report certain details on clients who are US citizens, green card holders or US tax residents or face a 30 percent gross withholding tax on all investments into the US. Preliminary guidance provides broad references as to which type of organizations may be classified FFIs including banks, funds, custodians, trustees, life insurance companies and others. The breathtaking scope of the FATCA legislation has not been lost on Commissioner Shulman who has called it 'the most important development in international reporting in a generation'.
Although neither the timing nor the specifics terms of the new VD program are yet known, it seems likely that they will likely require taxpayers to pay six years of back taxes, interest and a sizeable penalty. The 2009 program levied a penalty of 20 percent of the total asset value in all unreported foreign bank accounts and entities (calculated by reference to the year in which the value of such accounts and entities was the highest for the six year period at issue). Commissioner Shulman has stated that the new program will be less favourable, although it is unclear whether this will simply be in the form of a higher penalty.
As the financial world grows increasingly integrated and jurisdictions share ever more information, taxpayers who continue to hold undeclared taxable accounts become at a much greater risk of being discovered. The penalties for continued inaction can be severe. The new VD program may represent the best chance to enter the US tax net at a reduced cost. By engaging a tax professional and coming forward under the voluntary disclosure process prior to the IRS receiving information as to a taxpayer's non-compliance, individuals will have an opportunity to pay a predictable set of civil taxes, interests and penalties and mitigate the risk of criminal prosecution.
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