REFUND OF OFFSHORE PENALTY FOR FOREIGN-RESIDENT TAXPAYERS
Are you one of the nearly 20,000 people living abroad who participated in the 2009 Offshore Voluntary Disclosure Program (OVDP)? Did you pay the 20% penalty? If so, this may be your lucky day!
Many U.S. Taxpayers living abroad for the past number of years were invited to participate in the 2009 OVDP. The purpose of the program was to allow those coming forward to receive partial amnesty for previously unreported foreign financial accounts and assets. We say partial amnesty because penalties within the program were reduced, but not eliminated.
Upon being welcomed back into the system, you were also subject to taxes and penalties including an “offshore penalty.” In addition to the open-arms reception, the U.S. government agreed not to prosecute you criminally for failing to report and pay taxes or for failing to disclose your foreign financial interests. You could also travel easily in and out of the U.S.
Notwithstanding, the offshore penalty was based on the highest aggregate foreign account value during the disclosure period. Under the 2009 OVDP, the penalty rate was set at 20% for most participants. In the 2011 Offshore Voluntary Disclosure Initiative (OVDI) this was increased to 25%. Between the two initiatives, the one-time “offshore” penalty on the highest aggregate foreign account value over the disclosure period increased from 20% to 25%.
Under both the 2009 and 2011 programs, the offshore penalty was reduced to 5% in certain circumstances. However, the stringent criteria for the 2009 program meant that few taxpayers qualified for the lower rate. For the 2009 OVDP, the 5% rate was reserved for taxpayers who either (a) were foreign residents and unaware they were U.S. citizens, or (b) did not open and had minimal activity with the foreign accounts. There were no provisions for those taxpayers lawfully residing abroad. In the 2011 program, the IRS opened up the penalty tier to include a 12.5% option. This middle rate required that the highest aggregate account balance in each of the years covered by the OVDI be less than $75,000.
Nonetheless, on June 2, 2011, the IRS updated its OVDI Frequently Asked Questions (FAQ) document to allow an additional category of foreign resident taxpayers to qualify for a 5% offshore penalty rate. The Service likely enacted this change in recognition that U.S. persons abroad with “foreign” accounts and assets were, as a class, quite different from persons in the U.S. holding offshore assets. Thus, foreign resident taxpayers may qualify for the penalty relief if for all of the years of the voluntary disclosure.
(a) the taxpayer resides in a foreign country;
(b) the taxpayer has made a good faith showing that he or she has timely complied with all tax reporting and payment requirements in the country of residency; and
(c) the taxpayer has $10,000 or less of U.S. source income each year.
OVDI FAQ #52, revised June 2, 2011.
The guidance also stated that for such taxpayers, “real property, business interests, or artworks” would be excluded from the offshore penalty calculations.
The changes particularly benefited dual citizens and U.S. persons abroad who met the criteria and were participants in the 2011 program. Juxtaposition the IRS has made clear that taxpayers who participated in the 2009 OVDP should not face a higher penalty than similarly situated 2011 OVDI participants. Therefore, per FAQ #52, 2009 program participants may also retroactively take advantage of the new rules. This is the case even if they have already submitted the 20% penalty with a signed closing agreement. Accordingly, the new guidance provides an avenue for obtaining a refund in such cases through the submission of a formal request for the IRS to review and make a determination.
2009 OVDP participants who believe that the facts of their case qualify for the 5% reduced penalty criteria should consult with their tax advisors in order to ensure they realize a penalty reduction and/or refund. The same goes for any qualifying 2011 OVDI participants who may have remitted their materials prior to the revised guidance. Kundra & Associates is happy to assist in this endeavor. Please contact us at 301-637-8130 or online via
Sayeed Choudhury, Esq.
Chaya Kundra, Esq.