If you are still hiding money from the IRS in a one or more overseas accounts, you should know that stiffer penalties and new international precedence have been put into place that may make you change your mind. I.J. Zemelman, EA from Taxes for Expats offered to help break it down. The company helps expatriates all over the world deal with issues they face due to moving abroad – including help with relocation, taxes, and school & housing searches.

The Offshore Voluntary Disclosure Initiative (OVDI) is not new.  As a matter of fact, the 2012 OVDI is the third to be offered since 2009…and the most impressive.  After having recovered over $5B in once lost offshore tax revenue, the IRS is motivated to encourage even more people to come forward to collect taxes due without over stuffing federal prisons.  The efforts by the IRS to entice unreported overseas taxpayers and foreign account holders to come forward are on both sides of the spectrum from being more punitive to being more lenient.

What is the OVDI?

The Offshore Voluntary Disclosure Initiative is a program that was first introduced to evasive taxpayers with unreported overseas income and foreign bank accounts.  The OVDI offers these individuals a chance to come clean and file back taxes and/or report foreign bank accounts for reduced penalties and no criminal charges.  Before we get into what’s new for the 2012 OVDI, we will first take a look at the qualifications for eligibility.

In order for a delinquent taxpayer or foreign account holder to take advantage of the OVDI, the following 4 conditions must be met:

• Disclosure must be made before the IRS launches an investigation and begins using valuable tracking resources
• Money held in foreign accounts must have been legally generated
• Late filed returns and FBAR (Foreign Bank Accounts Report) documentation must not only be accurate and complete, but the taxpayer must also be willing to answer any questions and back up all claims
• The taxpayer must agree to pay all debt, including interest and penalties

Aside from the requirements, another consistent aspect among every OVDI is the pledge made by the IRS for qualifying taxpayers.  In return for voluntary disclosure of unpaid taxes and unreported bank accounts, the Internal Revenue Service agrees to:

• NOT report criminal financial activity to the Department of Justice
• Only require back taxes to be filed to 2003 (if longer history of FBAR non-compliance)
• Assess significantly lower penalties (predetermined cap) for late disclosure

Another consistency (from 2011) is that of reduced penalties.  Some qualifying US expats with a solid filing history may qualify for a late FBAR penalty of as low as 5%.  If you do not qualify for a 5% penalty rate but you have an aggregate account total of less than $75K, you may qualify for a reduced penalty of 12%.

More Punitive Changes to the 2012 OVDI

As you can see from the information above, the point and purpose to an OVDI hasn’t changed.  Things which have changed include cost of penalty, administration rights reserved by the IRS, and some procedural things.  The first item we will discuss is the raising of the penalty amount for filing late FBARS.  The original OVDI offered a reduced penalty rate of 25% of the aggregate account balance for each year.  This amount has been raised to 27.5%.  Another penalty amount which has changed is the penalty that can potentially be assessed if you are ineligible for the OVDI because you acted too late.  Depending on the severity of your non-compliance and the amount in accounts overseas, you may be charged as high as 75% (instead of 50%) of the total balance of all your accounts and have federal charges filed against you.

A new rule for 2012 applies to eligibility.  If you decide to appeal (or try to appeal) a country’s foreign tax administrator’s decision to disclose your information to the IRS, you must notify the IRS of your request.  If you do not make them aware of your request you are not eligible to get caught up your compliance under the protection of the OVDI.

There is currently no deadline established for filing back taxes or becoming compliant with FATCA regulations.  It’s important to understand, though, that the IRS has absolute power to revoke the program at any time or adjust other terms without notification.  This not only includes the timeline of accepted returns, but also the possibility of declaring account holders of a specific foreign bank ineligible for protection under the program.

More Lenient Changes to the 2012 OVDI

The first leniency change we’re going to discuss is among those changes we talked about earlier that the IRS can just make without prior notification.  In this case, it turned out to be not such a bad thing.  Beginning September 1, 2012, US expats who have been non-compliant with filing US expat tax returns and submitting FBAR information for a number of years virtually have a free pass by the IRS which only requires them to file up to 3 years of back taxes and 6 years of FBAR.  Qualifying taxpayers can not only avoid an investigation, but they’re also able to avoid penalties altogether.  So what is a qualifying taxpayer?  A qualifying taxpayer is a person who is determined to be ‘low risk’ by the IRS.  Generally speaking, ‘low risk’ taxpayers file relatively simple returns and have minimal or no tax liability (less than $1,500).

Taxpayers who either submit missing years’ returns which indicate a high risk for non-compliance or who have developed a track record of misfiling, not filing, or having returns result in unfavorable audits (or any proven risky tax behavior) will not be eligible for this consideration.  Ultimately, the decision is up to the IRS, and there is a possibility of lenience indicated for those who may not have been low risk in the past.  Even if you had filed ‘high risk’ returns in the past but you can prove by your US expat tax return that you qualify as low risk for the years in question, the IRS is likely to accept your return and approve your status.  If you are not accepted and you have multiple years of unfiled taxes, you may be investigated and asked to go well beyond 3 years back.  Keep in mind that this new addition to the OVDI does not guarantee freedom from criminal prosecution, so if you believe you have one or more chargeable offenses, you may be interested in speaking with a tax attorney before filing missing returns.  Visit the IRS website to learn more about new Expat Compliance Procedures.
In the 2011 OVDI, there is a new section regarding Canadian registered retirement plans.  American Expats who held a Canadian registered retirement plan during the years of their non-compliance with FBAR will not be assessed a miscellaneous penalty for that account.

Conclusion

Even though there have been some lenient adjustments in consideration of special circumstances, it’s hard not to wonder if some of the strict disqualification guidelines which are being imposed  aren’t so strict that they defeat the purpose of encouraging non-compliant expats to come forward.  Disqualification guidelines notwithstanding, though, one fact is certain:  The IRS is getting much better at tracking worldwide employment history and account information.  More and more countries are complying with the requests of the United States, and it’s getting harder to hide.  If you truly want to legally avoid having to pay US income tax, there is only one way out: Complete expatriation as a US Citizen or Green Card holder.  If you are currently not compliant with the IRS or the Department of Treasury, you will need to become compliant for this to be an option.