The Cayman Islands government is lauding a revision to a US disclosure programme that allows some US citizens or green-card holders to pay reduced US tax penalties on US-sourced income they did not report to the US Internal Revenue Service between 2003 and 2010.
A Cayman Islands delegation led by Premier McKeeva Bush in the spring lobbied officials to take this action, which affects US individuals living offshore, including in Cayman.
Originally, the IRS’ Offshore Voluntary Disclosure Initiative called for participants to be subject to a 25 per cent penalty on the value of their property. With the revision, which was announced in June, offshore residents – who have US$10,000 or less in unreported annual income from US sources – instead will be charged a penalty of 5 per cent, with the penalty now only applying to financial assets.
The disclosure programme ends 31 August, though an individual can request a 90-day extension before then.
To qualify for the reduced penalty, an offshore resident must have reported all of his or her income to their country of residence and paid the taxes due on such income to that country. However, the IRS informed the Cayman government’s US counsel, Sidley Austin, that people residing in jurisdictions that impose no income taxation – such as Cayman – would also be able to qualify for the reduced offshore penalty.
Tax, penalties due
Under the voluntary disclosure programme, participants can resolve their past US income tax and related obligations by paying all income tax due for the years 2003-2010, along with penalties, including the special offshore penalty, plus interest.
During meetings held in March with high-ranking US Treasury and IRS officials, and with tax counsel for the US Senate Finance Committee, the Cayman delegation requested a revision to the penalty on behalf of Cayman residents who are US citizens or green-card holders.
The Cayman delegation told officials that the special offshore penalty of 25 per cent that was related to unreported income was preventing many Cayman residents from participating in the programme.
“I am pleased that US officials took our concerns seriously and made this change so that more Cayman residents can resolve their US tax obligations by participating in the IRS’s voluntary disclosure programme,” Mr. Bush said.
Additionally, the IRS has created a new penalty of 12.5 per cent for people whose offshore accounts or assets did not surpass US$75,000 in any calendar year covered by the initiative.
Asher Harris, a US tax attorney specialising in international tax, said, “It struck me as very significant because the 25 per cent rate was extremely onerous. It seemed to me that when the IRS did include those lower rates, they were really looking to make it a much more attractive program for people to participate in – especially for those individuals who may have violated the US rules inadvertently.”
Mr. Harris added that the response to the reduced penalties has been less than overwhelming, based on his experience and anecdotes from other professionals in New York City. However, it will be impossible to gauge the true impact of the initiative until the IRS announces official participation numbers, which would happen sometime after the programme ends this month.
He said the disclosure programme gives individuals certainty as to what their liability to the IRS will be; if they do not come forward during this period and the IRS does come after them in the future, they cannot be sure what penalties they will be subject to. Accordingly, some individuals who have not been declaring assets have been weighing the pros and cons of participating in the disclosure programme.
“That’s the choice that you make. Maybe it works for you, maybe it won’t,” he said.
According to an IRS statement in February, when the disclosure programme was first announced, the first voluntary disclosure programme in 2009 carried a 20 per cent penalty covering a six-year period. That programme resulted in about 15,000 voluntary disclosures covering banks in more than 60 countries.
This year’s voluntary disclosure programme is part of the US government’s focus on identifying offshore tax evasion, leading up to the implementation of the Foreign Account Tax Compliance Act, which will compel participating foreign financial institutions to report information to the US government on accounts held by US individuals and entities, and will mandate that US individuals living offshore disclose more detailed information about their foreign assets. The new far-reaching initiative is being implemented in phases until 2015, according to the latest IRS schedule.