Internal Revenue Service Releases Guidance For 2012 Offshore Voluntary Disclosure Program And Offers Relief For U.S. Taxpayers Residing Abroad

The Internal Revenue Service has recently announced that more than 35,000 taxpayers have taken advantage of its voluntary disclosure programs for offshore bank accounts since their inception in 2009, and that those programs have generated more than $5 billion in additional revenue for the U.S. Treasury. Notwithstanding the unprecedented success of these efforts, the IRS nonetheless believes that more taxpayers with secret foreign bank accounts have not yet taken advantage of these amnesty programs. To encourage reluctant taxpayers to come forward, the IRS re-opened its offshore voluntary disclosure program for a third time in January 2012, and recently published further guidance clarifying the parameters of the new program. In a press release accompanying the new guidance, IRS Commissioner Douglas Shulman proclaimed that "[w]e continue to make strong progress in our international compliance efforts that help ensure honest taxpayers are not footing the bill for those hiding assets offshore. People are finding it tougher and tougher to keep their assets hidden in offshore accounts." The current IRS amnesty program—named the "2012 Offshore Voluntary Disclosure Program"—does not have a definitive end date and is subject to termination or change at any moment. In a related move, the IRS has announced new compliance procedures to enable U.S. or dual citizens who reside overseas to return to compliance with their U.S. tax obligations without the risk of substantial penalties, a move welcomed by thousands of expatriates who live abroad and may not be fully compliant with, or even aware of, their U.S. tax and FBAR obligations.

The 2012 Offshore Voluntary Disclosure Program

The IRS has issued long-awaited Frequently Asked Questions and Answers (FAQs) regarding its 2012 Offshore Voluntary Disclosure Program which provide additional specificity and make some key changes relative to the prior amnesty programs.1These changes are summarized below.

Eligibility for the 2012 OVDP

In an important development, the IRS has tightened the eligibility requirements for taxpayers who wish to enroll in the 2012 OVDP. According to FAQ 21, the mere fact that the IRS has served a "John Doe" summons, submitted a treaty request, or taken similar action with the respect to a particular foreign financial institution does not render every member of the "John Doe" class or group identified in the treaty request or other action ineligible to participate in the 2012 OVDP. However, once the IRS or the Justice Department obtains information under a "John Doe" summons, treaty request, or similar action that provides evidence of a specific taxpayer's non-compliance with tax laws or FBAR reporting requirements, then that particular taxpayer will be ineligible for participation in the 2012 OVDP. The FAQs expressly warn that "a taxpayer concerned that a party subject to a John Doe summons, treaty request or similar action will provide information about him to the Service should apply to make a voluntary disclosure as soon as possible."

The new FAQs also identify two new categories of taxpayers who are deemed ineligible to participate in the 2012 OVDP. First, a taxpayer who appeals a foreign tax administrator's decision authorizing the release of account information to the IRS and fails to serve notice of such appeal on the Attorney General of the United States (which is required under federal law) will be rendered ineligible to participate in the 2012 OVDP. Second, the IRS may in its discretion announce...