With all the furor surrounding Mitt Romney and his offshore accounts, it is little surprise that people are interested in the voluntary disclosure program that the IRS offers regarding offshore income and accounts.
The IRS offered similar programs in 2009 and in 2011. The 2012 program is a little different since it comes with a high penalty rate than the previous programs. However, the Offshore Voluntary Disclosure Program (OVDP) still provides taxpayers the chance to “come clean” on their own, and the penalties are still much lower than what they would be if the IRS detected the accounts on their own – and engaged in criminal prosecution.
For 2012, the program starts up open-ended. In the past, there was a deadline for filing the voluntary disclosure. Right now, there is no deadline for taxpayers wishing to apply for the program. The IRS has said that this could change in the future, but right now, though, the 2012 version is expected to be indefinite for those meeting the requirements of the OVDP.
Becoming Compliant with US Tax Law
The IRS states that the OVDP is meant to help taxpayers become properly compliant with US tax law. There are citizens that shelter income and assets in offshore accounts and other foreign entities in order to avoid paying taxes. If the IRS catches taxpayers doing this, there are hefty penalties, and the IRS can recommend that the Department of Justice pursue criminal charges.
With the OVDP, these taxpayers come forward and share that information voluntarily – without it being run down by the IRS. In these cases, there is a penalty for avoiding taxes, but the IRS won’t have the Justice Department press charges. The period of time covered by the OVDP is the most recent tax years for which the due date has already passed. Corporations, partnerships, and trusts can also take advantage of this program. However, once you are already under examination, you are not eligible to participate.
The requirements of the program include :
- Provide copies of tax returns filed during the years that cover your voluntary disclosure. Include all schedules, and amended tax returns.
- Amend the proper tax returns, covering the years included in your disclosure. You will need to include form TD F 90-22.1 for each affected year, which shares information on foreign accounts.
- Offer complete information on your offshore accounts.
- You will have to pay a 20% penalty on your underpayments for the years involved; these are accuracy-related penalties.
- You will also have to pay any failure to pay penalties that may be applicable in your situation.
- Pay other penalties or tax liabilities as figured through the disclosure program.
- Execute Form 906, which is a final determination on specific matters.
- Cooperate with the IRS efforts to enforce tax compliance in the future.
- Don’t forget accounts that might be covered under the U.S. – Canada income tax treaty.
It’s worth noting that you can also voluntary disclose underpayment under this program even if you don’t actually have offshore accounts, and your non-compliance is related to domestic assets.