New Voluntary IRS Program May Aid Taxpayers with Undisclosed Foreign Accounts

04.25.2011

Owing to the success of a similar program in 2009, the Internal Revenue Service (“IRS”) created a second voluntary disclosure initiative to allow U.S. taxpayers with undisclosed offshore accounts[1] from 2003 through 2010, to become current with their taxes. The new program, called the 2011 Offshore Voluntary Disclosure Initiative (“OVDI”), differs from the 2009 program in that it carries higher monetary penalties, specifically an “offshore penalty” with a cap at 25% of the highest year’s aggregate account value during the period of voluntary disclosure. This “offshore penalty” will be assessed in addition to applicable accuracy and delinquency penalties and the payment of any taxes and interest due on the income earned by the offshore account. Even with the steeper 25% penalty, the benefits of utilizing the OVDI, including the avoidance of fraud and foreign information return penalties and criminal prosecution, may outweigh the monetary costs for the right taxpayer. In order to qualify for the OVDI, a taxpayer must file certain documentation with the IRS before August 31, 2011. Compliance with the program includes the submission of previously filed income tax returns (originals and amended) for the tax years covered by the voluntary disclosure, the completion and submission of amended income tax returns containing schedules detailing the previously unreported income for those years at issue, and the completion and submission of a Form TD F 90-22.1 used to report offshore interests for calendar years 2003-2010. Additionally, taxpayers seeking to utilize the OVDI must be cooperative and provide information on all of their offshore financial accounts, institutions, and facilitators. Lastly, taxpayers must agree, in writing, to an extension of the statute of limitations for the assessment of taxes and penalties by the IRS. As noted above, the additional “offshore penalty” assessed under the OVDI are capped at 25% of the highest year’s aggregate value of the offshore accounts during the period of voluntary disclosure. This penalty may be reduced in cases where the aggregate offshore account balance in each year was less than $75,000 (reduced to 12.5%); where the taxpayer did not open the account, had minimal contact with the account, did not withdraw money in excess of $1,000 from the account in any year (except to transfer of the funds into a U.S. account), and can demonstrate that only account earnings have escaped taxation in the U.S. (reduced to 5%); or where a taxpayer making a voluntary disclosure would owe less money in penalties if the OVDI was not utilized (reduced to the maximum amount imposed under existing statutes). If you believe that you are eligible to participate in the OVDI for 2011, please do not hesitate to contact our offices to schedule a consultation to discuss participation in the program. While the current OVDI offers a valuable opportunity for taxpayers to become current in their taxes, its implications, including state tax impact, should be carefully considered before any decision to participate is made. For more information please contact Jodi C. Lipka. -------------------------------------------------------------------------------- [1] Please note that despite the use of the word “accounts” throughout this article, the program covers disclosure for both foreign bank accounts and interests in foreign entities.