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2011 Offshore Voluntary Disclosure Initiative

On February 8, 2011 IRS Commissioner Douglas Shulman announced a new Offshore Voluntary Disclosure Initiative (“OVDI”).  The program offers another opportunity to U.S. taxpayers who own unreported foreign accounts, business interests, and beneficial interests in a trust or estate to file amended income tax returns and related disclosure forms. Participation in the OVDI will allow delinquent taxpayers to avoid not only the full brunt of potential civil penalties and interest, but also criminal prosecution.  The OVDI is effective immediately and extends through August 31, 2011.

Approximately 15,000 taxpayers opted to participate in the 2009 Voluntary Disclosure Program (“VDP”).  An additional 3,000 taxpayers have voluntarily disclosed foreign assets to the IRS after the VDP ended.

It is important for you to inform your clients of this new initiative.  The IRS has significantly increased enforcement efforts since 2009.  Those efforts will only increase in the future. Commissioner Shulman stated on Tuesday that “(c)ombating international tax evasion is a top priority for the IRS. We have additional cases and banks under review. The situation will just get worse in the months ahead for those hiding assets and income offshore. This new disclosure initiative is the last, best chance for people to get back into the system.”

I have attended many continuing education seminars since 2009 at which key IRS officials and lawyers from the United States Department of Justice addressed IRS enforcement objectives. Without fail, these individuals expressed their intent to aggressively pursue taxpayers who own or control undisclosed foreign assets and investments.

There are key differences between the 2009 VDP and the 2011 OVDI.

  • A pre-filing procedure is available to determine a taxpayer’s exposure to criminal prosecution.
  • The reporting period has increased from six to eight years: 2003 through 2010 (the “Tax Years”).
  • The FBAR penalty is increased from 20% to 25% of the highest aggregate value of the previously undisclosed foreign assets during the Tax Years.
  • In addition to an accuracy related penalty of 20% (the “Accuracy Related Penalty”), failure to file and failure to pay penalties (the “Delinquency Penalties”) will be assessed on all increased income tax liabilities for the Tax Years.
  • Taxpayers who wish to participate in the program must provide much more information by the August 31, 2011 deadline, as detailed below.
  • Taxpayers face more rigorous and time sensitive information disclosure requirements in order to participate in the OVDI.

In order to participate in the OVDI each taxpayer must, by August 31, 2011, provide the IRS with the following:

  • amended income tax returns and all required information returns for the Tax Years;
  • copies of previously filed original (and any previously amended) income tax returns for the Tax Years;
  • additional information on forms provided by the IRS regarding the nature and extent of the taxpayer’s foreign assets and the financial institutions
    at which accounts were maintained;
  • in the case of taxpayers with aggregate foreign asset values in excess of $500,000 at any time during the Tax Years, provide bank account statements reflecting all activity in the accounts for the Tax Years;
  • an executed agreement to extend the statute of limitations to assess income taxes, Accuracy Related and Delinquency Penalties, and the FBAR
    penalties; and
  • either (i) a check in full payment of all additional taxes, penalties, and interest or (ii) a proposed payment arrangement and completed Collection
    Information Statement for the taxpayer and any business entity owned by the taxpayer (Forms 433-A and 433-B).

The IRS is emphasizing that a “full and complete” submission is required for acceptance into the OVDI program.  Because of the difficulties in assembling this information, it is imperative clients begin this process without delay.

As with the VDP, participation in the OVDI enables taxpayers who failed to properly disclose foreign investments to the IRS and/or report the income arising from those investments to avoid significant civil monetary penalties.  Participants who acted willfully in omitting the income and failing to disclose the assets will also avoid potential jail time for committing a tax crime.

As you know the FBAR filing requirements continue to apply to any U.S. person with offshore financial assets which exceed $10,000 in a calendar year. Additional disclosure requirements may also apply to U.S. persons who:

  • own interests in foreign corporations or partnerships,
  • transferred assets to foreign corporations or partnerships,
  • are grantors or beneficiaries of a foreign trust,
  • transferred assets to a foreign trust,
  • are a beneficiary of a foreign estate, or
  • received gifts of more than $100,000 from a non-U.S. person.

I strongly encourage you to advise anyone you know or have reason to believe may have an undisclosed and reportable interest in a foreign asset or entity to participate in the OVDI.  Because of an understandable reluctance on the part of clients to speak about these issues, very direct questions about gifts, foreign assets, and interest in foreign corporations and partnerships may be necessary.

If you have questions or concerns regarding the OVDI or any other matter please contact me. I am always available to answer your questions.