On February 8, 2011, the Internal Revenue Service announced a
new voluntary disclosure initiative designed to bring noncompliant
US taxpayers with unreported offshore income and assets back into
the fold. The 2011 Offshore Voluntary Disclosure Initiative (OVDI)
follows on the heels of the 2009 Offshore Voluntary Disclosure
Program (OVDP), which ran from March 23, 2009, to October 15, 2009,
and brought in 15,000 voluntary disclosures. Since that time, more
than 3,000 taxpayers have come forward with undisclosed bank
accounts. These taxpayers will also be eligible to take advantage
of the 2011 OVDI.
Not surprisingly, the 2011 OVDI penalty structure is higher than
that of the 2009 OVDP. Individuals are required to pay a penalty of
25 percent of the amount in the foreign bank accounts in the year
with the highest aggregate account balance over the past eight
years, plus back taxes and interest for the past eight years and
accuracy-related and/or delinquency penalties. (The 2009 OVDP
required six years of back taxes and a 20 percent penalty of the
highest account balance in the foreign bank account.) In return,
the IRS will forgo criminal prosecution and will not assert other
civil penalties, including the FBAR penalty (which alone could
exceed the value of the account).
As under the 2009 OVDP, some taxpayers may be eligible for a
reduced 5 percent penalty for inherited accounts that they have
never accessed. In addition, the 2011 OVDI creates a new penalty
category of 12.5 percent for offshore accounts or assets that did
not surpass $75,000 in any calendar year.
Taxpayers who wish to participate must file all original and
amended tax returns and pay all taxes, interest and
accuracy-related penalties by August 31, 2011, in order to take
advantage of the new initiative. The IRS cautions that this is a
hard-and-fast deadline that will not be extended. It will be
challenging for some taxpayers to obtain all information from
offshore banks by this date, so they need to act promptly.
It is always preferable for taxpayers to come forward before the
IRS finds them. Discovery by the IRS has become increasingly likely
in view of expanded US information reporting obligations for
offshore assets, cooperation among countries under tax information
exchange treaties, the sale and exchange of stolen lists of clients
of offshore banks, and aggressive IRS pursuit of hidden assets
offshore.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
