OVDP: new guidance

05 July 2012


Tom Louthan, Jim Casimir and Steve Onken report on new details that have emerged on the 2012 IRS Offshore Voluntary Disclosure Program

The US Internal Revenue Service (IRS) released additional guidance on the 2012 Offshore Voluntary Disclosure Program (OVDP) on 26 June 2012. Under the 2009 and 2011 programs, the IRS has collected more than USD5 billion in back taxes, interest and penalties from over 33,000 voluntary disclosures.[1] Since January 2012 when the IRS reopened the OVDP, another 1,500 disclosures were made.[2]

The OVDP is part of the IRS effort to stop offshore tax evasion and encourage tax compliance. For the 2012 OVDP, the ‘offshore penalty’ is raised to 27.5 per cent (up from a 25 per cent offshore penalty for 2011). Smaller offshore accounts less than USD75,000 in each of the years covered by the OVDP would face a 12.5 per cent offshore penalty, or a 5 per cent penalty for limited situations involving de minimis contact. The latest OVDP is open for an indefinite period until the IRS announces otherwise.

The IRS has posted online frequently asked questions and answers for the 2012 OVDP. [3] Additional details on eligibility are provided and examples updated with references to the new filing compliance procedures. In the news release, the IRS announced that it is tightening OVDP eligibility requirements. In situations when a taxpayer appeals a foreign tax administrator’s decision authorising the release of account information to the IRS, the taxpayer is required to notify the US Justice Department. Taxpayers would not be eligible for the OVDP if the taxpayer fails to notify the US Justice Department about the appeal.

Relief for US citizens overseas with low compliance risk

The IRS released their proposed plan to help US citizens residing overseas, particularly dual citizens, for catching up with tax filings and resolving foreign retirement plan issues.[4] New procedures will be available beginning on 1 September 2012 to allow US taxpayers living abroad, who are low compliance risks, an opportunity to get current with their tax filing obligations, without facing penalties or additional enforcement action. Generally, those with simple tax returns and owing USD1,500 or less in tax for any of the covered years would qualify.[5] This is welcome news for US taxpayers living abroad who have only recently become aware of their filing requirements for US federal income tax returns and reports of Foreign Bank and Financial Accounts (FBARs).

The new procedures also will allow resolution of issues related to foreign retirement plans. Income tax treaties may allow for income deferral under US tax law, but only if an election is made on a timely basis. The streamlined procedures will be made available to resolve low compliance risk situations, even though the election was not made on a timely basis.

Key elements of the new procedures for low compliance risk US taxpayers living abroad to get current with their tax obligations include:

·         filing delinquent tax returns along with appropriate related information returns for the past three years

·         filing delinquent FBARs for the past six years[6]

·         providing additional information regarding compliance risk.

The IRS said that the intensity of the IRS review for these submissions would be based on the level of compliance risk. For those taxpayers presenting a low compliance risk, there would be an expedited IRS review, and the IRS would not assert penalties or pursue follow-up actions.

Higher compliance risk – prepare for more thorough review

Those submissions that present higher compliance risk would not be eligible for the expedited procedure, and would be subject to a more thorough review.

Risk factors taken into account would focus on indications of sophisticated tax planning or avoidance, or material economic activity in the United States. The presence of high compliance risk factors could lead to an audit, covering more than three tax years, and following a process similar to opting out of the ODVP.[7]

Reasonable cause claims

US taxpayers residing overseas who are claiming reasonable cause for failure to file tax returns, information returns, or FBARs have to explain why there is reasonable cause for not filing previously.[8] 

As with the announcement of the reopening of the OVDP in January 2012, the IRS said that more details would be forthcoming. Additional guidance on the low compliance risk program should be posted online prior to the effective date of the new procedure on 1 September 2012.

US taxpayers living abroad with higher compliance risks should take care in making a decision on whether to apply for the new OVDP. For some taxpayers, the penalties that apply under OVDP will suggest that alternative action is appropriate. For others, electing into the program and then opting out may be the preferred route.

Tom Louthan, Jim Casimir and Steve Onken, Casimir Consulting


[1] IRS news release IR-2012-64, 26 June 2012: www.irs.gov/newsroom/article/0,,id=258430,00.html

[2] IR-2012-5, January 2012: www.irs.gov/newsroom/article/0,,id=252162,00.html

[3] 2012 Offshore Voluntary Disclosure Program, frequently asked questions & answers, 26 June 2012: www.irs.gov/businesses/small/international/article/0,,id=256774,00.html

[4] IRS news release, IR-2012-65, 26 June 2012: www.irs.gov/newsroom/article/0,,id=258431,00.html

[5] IRS new filing compliance procedures for non-resident US taxpayers:


[6] Additional details on FBAR: www.irs.gov/businesses/small/article/0,,id=148849,00.html

[7] IRS opt out and removal guide: www.irs.gov/pub/newsroom/2011_ovdi_opt_out_and_removal_guide_and_memo_june_1_2011.pdf

[8] Additional details on reasonable cause, and a summary of information about federal income tax return, FBAR filing requirements and potential penalties: IRS Fact Sheet FS-2011-13, December 2011 www.irs.gov/newsroom/article/0,,id=250788,00.html




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