Update: IRS approach to the Voluntary Disclosure Program of 2012
In a recent American Bar Association webcast officials from the IRS discussed recent developments in its international tax enforcement activities.
Voluntary Compliance Programs
Programs during 2009 and 2011 netted the IRS $5 billion. These programs had fixed time periods for participation. The current 2012 program currently has no fixed “end date”, but this may at some point be closed by the IRS.
In general, the 2012 program is similar to the prior 2009 and 2011 programs. Taxpayers must fully disclose the past activity; pay all applicable taxes plus interest; and then in lieu of all other penalties a fixed penalty is applied based on a percentage of undisclosed offshore assets. The 2009 fixed penalty was 20%; the 2011 penalty was 25%; and the fixed penalty under the current program is 27.5%.
The current program, however, recognizes that certain long-term foreign residents may have a basis for their non-compliance. This would include what are referred to as “accidental Americans.” This would include, for example, individuals born in the US of foreign parents temporality in the US for work, but who have lived most of their lives outside the US; and individuals born outside the US of US citizen parents who have never lived in the US. If these individuals can show “reasonable cause” for their non-compliance, the fixed penalty can be reduced to 5%.
The current program also provides for a reduced 12.5% penalty for those individuals whose foreign accounts have not exceeded $75,000.
The IRS is now actively reviewing information received from the Swiss bank UBS and has begun the process of gaining information under what is called a John Doe summons, issued to HSBC.
The IRS has been successful in recent court cases involving the imposition of penalties relating to failure to file the FBAR. This is the report that must be made to disclose an interest in foreign bank accounts. There are specific penalties (including potential criminal penalties) for failure to file this report. But often overlooked is that taxpayers are required to indicate their interest in foreign bank accounts on their income tax returns. Intentional failure to disclose this information can lead to criminal charges. In addition, based on a recent court ruling, the “reckless disregard” of these rules can also lead to liability.
Tax Information Exchanges
The US is increasing the number of its Tax Information Exchange agreements in addition to the information exchange agreements in many of the US double tax treaties. Agreements are in place for example with Lichtenstein and are in the process of being finalized with Brazil, Columbia and Chile.
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