IRS Closes Offshore Loophole & Announces New Details on OVDP 

June 27, 2012

The IRS closed a loophole Tuesday that has been used by some taxpayers with offshore accounts. Under existing law, if a taxpayer challenges in a foreign court the disclosure of tax information by that government, the taxpayer is required to notify the U.S. Justice Department of the appeal. The IRS said that if the taxpayer fails to comply with this law and does not notify the U.S. Justice Department of the foreign appeal, the taxpayer will no longer be eligible for the Offshore Voluntary Disclosure Program (OVDP). The IRS also put taxpayers on notice that their eligibility for the OVDP could be terminated once the U.S. government has taken action in connection with their specific financial institution.

The voluntary disclosure programs are part of a wider effort by the IRS to stop offshore tax evasion, help bring people back into the tax system and ensure tax compliance. This includes beefed up enforcement, criminal prosecution and implementation of third-party reporting through the Foreign Account Tax Compliance Act, also known as FATCA.

The IRS Offshore Voluntary Disclosure Programs have so far resulted in the collection of more than $5 billion in back taxes, interest and penalties from 33,000 voluntary disclosures made under the first two programs, according to IRS Commissioner Doug Shulman. In addition, another 1,500 disclosures have been made under the new program announced in January. 

The IRS reopened the 2012 OVDP following continued strong interest from taxpayers and tax practitioners after the closure of the 2011 and 2009 programs. This program will remain open for an indefinite period until otherwise announced. 

The current OVDP is similar to the 2011 program in many ways, but with a few key differences. Unlike last year, there is no set deadline for people to apply.  However, the terms of the program could change at any time going forward. The offshore penalty has been raised to 27.5 percent from 25 percent in the 2011 program. The reduced penalty categories of 5 percent and 12.5 percent are still available.