The Internal Revenue Service yesterday reopened the offshore voluntary disclosure program to help people hiding offshore accounts get current with their taxes and announced the collection of more than $4.4 billion so far from the two previous international programs.

The IRS reopened the Offshore Voluntary Disclosure Program (OVDP) following continued strong interest from taxpayers and tax practitioners after the closure of the 2011 and 2009 programs. The third offshore program comes as the IRS continues working on a wide range of international tax issues and follows ongoing efforts with the Justice Department to pursue criminal prosecution of international tax evasion.  This program will be open for an indefinite period until otherwise announced.

“Our focus on offshore tax evasion continues to produce strong, substantial results for the nation’s taxpayers,” said IRS Commissioner Doug Shulman. “We have billions of dollars in hand from our previous efforts, and we have more people wanting to come in and get right with the government. This new program makes good sense for taxpayers still hiding assets overseas and for the nation’s tax system.”

The program 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.  For example, the IRS may increase penalties in the program for all or some taxpayers or defined classes of taxpayers – or decide to end the program entirely at any point.

“As we’ve said all along, people need to come in and get right with us before we find you,” Shulman said. “We are following more leads and the risk for people who do not come in continues to increase.”

The third offshore effort comes as Shulman also announced today the IRS has collected $3.4 billion so far from people who participated in the 2009 offshore program, reflecting closures of about 95 percent of the cases from the 2009 program. On top of that, the IRS has collected an additional $1 billion from up front payments required under the 2011 program.  That number will grow as the IRS processes the 2011 cases.

In all, the IRS has seen 33,000 voluntary disclosures from the 2009 and 2011 offshore initiatives. Since the 2011 program closed last September, hundreds of taxpayers have come forward to make voluntary disclosures.  Those who have come in since the 2011 program closed last year will be able to be treated under the provisions of the new OVDP program.

The overall penalty structure for the new program is the same for 2011, except for taxpayers in the highest penalty category.

For the new program, the penalty framework requires individuals to pay a penalty of 27.5 percent of the highest aggregate balance in foreign bank accounts/entities or value of foreign assets during the eight full tax years prior to the disclosure. That is up from 25 percent in the 2011 program. Some taxpayers will be eligible for 5 or 12.5 percent penalties; these remain the same in the new program as in 2011.

Participants must file all original and amended tax returns and include payment for back-taxes and interest for up to eight years as well as paying accuracy-related and/or delinquency penalties.

Participants face a 27.5 percent penalty, but taxpayers in limited situations can qualify for a 5 percent penalty. Smaller offshore accounts will face a 12.5 percent penalty. People whose offshore accounts or assets did not surpass $75,000 in any calendar year covered by the new OVDP will qualify for this lower rate. As under the prior programs, taxpayers who feel that the penalty is disproportionate may opt instead to be examined.

The IRS recognizes that its success in offshore enforcement and in the disclosure programs has raised awareness related to tax filing obligations.  This includes awareness by dual citizens and others who may be delinquent in filing, but owe no U.S. tax.  The IRS is currently developing procedures by which these taxpayers may come into compliance with U.S. tax law. The IRS is also committed to educating all taxpayers so that they understand their U.S. tax responsibilities.

The IRS will be updating key Frequently Asked Questions and providing additional specifics on the offshore program.

The new tax gap estimate represents the first full update of the report in five years, and it shows the nation’s compliance rate is essentially unchanged from the last review covering tax year 2001.

The tax gap statistic is a helpful guide to the scale of tax compliance and to the persisting sources of low compliance, but it is not an adequate guide to year-to-year changes in IRS programs or to year-to-year returns on IRS service and enforcement initiatives.

The following table summarizes the new estimates being released today, as compared to the 2001 estimates, along with the total tax liabilities in each year.

The voluntary compliance rate — the percentage of total tax revenues paid on a timely basis — for tax year 2006 is estimated to be 83.1 percent. The voluntary compliance rate for 2006 is statistically unchanged from the most recent prior estimate of 83.7 percent calculated for tax year 2001.

On a relative basis, the tax gap is largely in line with the growth in total tax liabilities. In addition, some growth in the tax gap estimate is attributed to better data and improved estimation methods. For example, the IRS developed a new econometric model for estimating the tax gap attributable to small corporations which was then applied to newer operational data. Also, large corporation tax gap estimates for 2006 are based on improved statistical methods and updated data. Finally, the data related to individual income taxpayers continues to improve based on improved estimation techniques and newer data.

The tax gap can be divided into three components: non-filing, underreporting and underpayment.

As was the case in 2001, the underreporting of income remained the biggest contributing factor to the tax gap in 2006. Under-reporting across taxpayer categories accounted for an estimated $376 billion of the gross tax gap in 2006, up from $285 billion in 2001. Tax non-filing accounted for $28 billion in 2006, up from $27 billion in 2001. Underpayment of tax increased to $46 billion, up from $33 billion in the previous study.

Overall, compliance is highest where there is third-party information reporting and/or withholding. For example, most wages and salaries are reported by employers to the IRS on Forms W-2 and are subject to withholding. As a result, a net of only 1 percent of wage and salary income was misreported. But amounts subject to little or no information reporting had a 56 percent net misreporting rate in 2006.

A Notice proposing a new revenue procedure, posted today on IRS.gov, revises the threshold requirements for requesting equitable relief and revises the factors used by the IRS in evaluating these requests. The factors have been revised to ensure that requests for innocent spouse relief are granted under section 6015(f) when the facts and circumstances warrant and that, when appropriate, requests are granted in the initial stage of the administrative process. The new guidelines are available immediately and will remain available until the finalized revenue procedure is published. The IRS will immediately begin using these new guidelines when evaluating equitable relief requests.

“The IRS is significantly changing the way we determine innocent spouse relief,” said IRS Commissioner Doug Shulman. “These improvements should dramatically enhance our process to make it fairer for victimized taxpayers facing difficult situations.”

This is the second major change made to the innocent spouse program. In July, the IRS extended help to more innocent spouses by eliminating the two-year time limit that previously applied to requests seeking equitable relief.

Form 8938 (Statement of Specified Foreign Financial Assets) will be filed by taxpayers with specific types and amounts of foreign financial assets or foreign accounts. It is important for taxpayers to determine whether they are subject to this new requirement because the law imposes significant penalties for failing to comply.

The Form 8938 filing requirement was enacted in 2010 to improve tax compliance by U.S. taxpayers with offshore financial accounts. Individuals who may have to file Form 8938 are U.S. citizens and residents, nonresidents who elect to file a joint income tax return and certain nonresidents who live in a U.S. territory.

Form 8938 is required when the total value of specified foreign assets exceeds certain thresholds.  For example, a married couple living in the U.S. and filing a joint tax return would not file Form 8938 unless their total specified foreign assets exceed $100,000 on the last day of the tax year or more than $150,000 at any time during the tax year.

The thresholds for taxpayers who reside abroad are higher. For example in this case, a married couple residing abroad and filing a joint return would not file Form 8938 unless the value of specified foreign assets exceeds $400,000 on the last day of the tax year or more than $600,000 at any time during the year.

Instructions for Form 8938 explain the thresholds for reporting, what constitutes a specified foreign financial asset, how to determine the total value of relevant assets, what assets are exempted, and what information must be provided.

Form 8938 is not required of individuals who do not have an income tax return filing requirement.

The new Form 8938 filing requirement does not replace or otherwise affect a taxpayer’s obligation to file an FBAR (Report of Foreign Bank and Financial Accounts).  For more go to the FBAR page on this website.

Failing to file Form 8938 when required could result in a $10,000 penalty, with an additional penalty up to $50,000 for continued failure to file after IRS notification.  A 40 percent penalty on any understatement of tax attributable to non-disclosed assets can also be imposed. Special statute of limitation rules apply to Form 8938, which are also explained in the instructions.

Form 8938, the form’s instructions, regulations implementing this new foreign asset reporting, and other information to help taxpayers determine if they are required to file Form 8938 can be found on the FATCA page of irs.gov.

Under the IRS’s Foreign Bank Account Report (FBAR) rules, any US person (not necessarily a US resident) who has a financial interest in or signature authority, or other authority, over any financial account in a foreign country, if the aggregate value of these accounts exceeds USD10,000 at any time during the calendar year, is required to file a return.

The FBAR is considered by the IRS as a tool to help the US government to identify persons who may be using foreign financial accounts to circumvent US law. Investigators use FBARs to help identify or trace funds used for illicit purposes or to identify unreported income maintained or generated abroad.

Canadian Finance Minister Jim Flaherty had, in an open letter to the media written in September this year, pointed out the difficulty which the FBAR rules caused to the many dual US-Canadian citizens and their relatives living in Canada, the majority of whom, he said, hold only distant links with the US and were, therefore, unaware of the disclosure rules.

“Because they work and pay taxes in Canada, they generally do not owe any taxes in the United States in any event. Their only transgression is failing to file the IRS paperwork they were never aware they were required to file,” he observed. He believed that, as these individuals are “not high rollers with offshore bank accounts”, they are rather “people who have made innocent errors of omission that deserve to be looked upon with leniency”.

The prospect of having to comply with such regulations will impact on the lives of Canadian people, according to Flaherty. He added that the threat of prohibitive fines for simply failing to file a return they were unaware they had to file, “is a frightening prospect that is causing unnecessary stress and fear among law abiding hardworking dual citizens”.

In reply, the US’s Canadian Embassy has indicated that the IRS is about to issue a revised regulation that will exempt from late-filing penalties those US citizens living in Canada who were unaware of the FBAR rules, or have another reasonable explanation for non-filing, and who owe no US taxes.

Cathy McLeod, Parliamentary Secretary to the Canadian Minister of National Revenue, following a question in the House of Commons, replied that the government was “happy to report that the US has agreed to show leniency. It will waive penalties for many and allow potential refunds of penalties already paid. More details will follow in the coming weeks.”

Between 2003 and 2006, Dunnica Lampton (“Lampton”), the U.S. Attorney for the Southern District of Mississippi, prosecuted Oliver Diaz (“Diaz”), a Mississippi Supreme Court justice, and Diaz’s wife, Jennifer Diaz, for fraud, bribery, and tax evasion. Diaz was acquitted, but his wife pleaded guilty to tax evasion. Lampton then filed a complaint with the Mississippi Commission on Judicial Performance (the “Commission”) regarding Diaz’s conduct. He included copies of the Diazes’ federal tax records obtained during the criminal investigation. The Commission dismissed the complaint in December 2008.

The Diazes sued Lampton in federal court, alleging a violation of 42 U.S.C. § 1983 based on deprivation of rights under a number of statutes that prohibit government officials from releasing private tax records obtained in the course of their duties, including 26 U.S.C. §§ 6103, 7213, and 7431. Lampton filed a motion to dismiss the § 1983 claim, arguing that absolute prosecutorial immunity shielded his decision to give the tax records to the Commission. The district court denied the motion, and Lampton appealed.

The Fifth Circuit affirmed the district court’s denial of Lampton’s motion to dismiss, holding that prosecutorial immunity did not apply to Lampton’s conduct. The appellate court reasoned that, as a federal prosecutor, Lampton had no duty to bring complaints before a state ethics commission, and the actions for which Lampton sought immunity were unrelated to his prosecution of the Diazes. Further, Lampton could have reported Diaz’s misconduct without releasing the tax records, so his ethical responsibilities did not compel violation of the federal statute.

In 1993, Emadeddin Muntasser (“Muntasser”) incorporated Care International, Inc. (“Care”), an organization with a stated purpose of providing worldwide humanitarian aid. Samir Al–Monla (“Al- Monla”) and Muhamed Mubayyid (“Mubayyid”) served as officers of Care. Soon after incorporating Care, Muntasser applied to have the organization granted tax-exempt status by filing IRS Form 1023. In Care’s Form 1023 filing, Muntasser did not disclose the organization’s numerous activities advocating for Islamic jihad. Muntasser also denied that Care was a successor to any other organization, despite the fact that Care had replaced the Boston branch of a pro-jihad organization. Based on the information provided, the IRS approved Care’s application for tax-exempt status.  In order to maintain its tax exemption, Care filed annual IRS Forms 990, disclosing the earnings and activities of the organization. None of Care’s Form 990s revealed its pro-jihad activities. Although Muntasser had failed to disclose these same activities in Care’s initial application, the defendants answered “No” when the Form 990s asked whether the organization engaged in any activities that had not previously been reported to the IRS.

At trial, the district court acquitted Al-Monla of all charges, convicted Muntasser of a false statement to the FBI, and convicted Mubayyid of scheming to conceal material facts from the IRS (18 U.S.C. § 1001(a)(1)), endeavoring to obstruct the administration of the Internal Revenue laws (26 U.S.C. § 7212(a)), and filing a false tax return (26 U.S.C. § 7206(1). The district court acquitted all the defendants of conspiracy under 18 U.S.C. § 371. The defendants and the government appealed.

The First Circuit reversed the district court’s acquittal of the defendants on the conspiracy count and affirmed the defendants’ other convictions. With respect to Mubayyid’s convictions under 26 U.S.C. §§ 7206(1) and 7212(a), the court noted that these were based on his answers to Question 76 on Care’s Form 990, which asked, “Did the organization engage in any activity not previously reported to the IRS?” For each of the charged years, Mubayyid answered “No,” an answer the government argued intentionally concealed from the IRS Care’s non-charitable purposes. Mubayyid countered that Question 76 was fundamentally ambiguous, precluding the jury from finding deliberate falsity.

Because the instructions to Question 76 required an explanation of any “significant changes” in the organization’s activities, Mubayyid argued that he was not required to report activities that were ongoing and unchanged, even if they had never previously been reported. The court determined, however, that Question 76 plainly sought the disclosure of information about activities not accurately depicted on the organization’s Form 1023, or in any other year’s return. Accordingly, the court held that sufficient evidence supported the jury’s finding that Mubayyid willfully failed to disclose on Form 990 at least one reportable activity that occurred in each of the charged years.