On February 8, 2011, the Internal Revenue Service (“IRS”) announced the Offshore Voluntary Disclosure Initiative (OVDI) designed to assist U.S. persons with offshore assets to become compliant with U.S. tax laws. The voluntary disclosure initiative is only available through August 31, 2011.
The ODVI permits taxpayers who have failed to file tax information returns to avoid penalties for failure to file such returns if (1) the taxpayer has reported all offshore income and (2) the taxpayer has paid tax on all taxable income with respect to all transactions.
Penalties for failure to file information returns in connection with offshore accounts can be severe. Two common examples of required information returns are as follows:
- Form 926, Return by a U.S. Transferor of Property to a Foreign Corporation - A taxpayer is required to report transfers of property, including cash, to a foreign corporation. The penalty for failure to file each required return is ten percent of the value of the property transferred, up to a maximum of $100,000 per return, with no limit if the failure to report was intentional.
- Form 8865, Return of U.S. Persons with Respect to Certain Foreign Partnerships - A taxpayer with certain interests in a foreign partnership is required to file this form to report contributions to, as well as all transactions of, the foreign partnership. Penalties include $10,000 for failure to file each return, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50,000 per return, and ten percent of the value of any transferred property that is not reported, subject to a $100,000 limit.
Delinquent information returns (such as those described above) must be filed with the taxpayer's respective IRS Service Center according to the instructions for the form by August 31, 2011, and a statement must be attached explaining why the information returns are being filed late.
Taxpayers who reported and paid tax on all their taxable income for prior years but did not file Form TD F 90-22.1 (Report of Foreign Bank and Financial Accounts, commonly known as an “FBAR”), must file all delinquent FBAR reports from 2003 through 2010 with the Treasury Department’s Detroit Servicing Center (Department of Treasury, Post Office Box 32621, Detroit, MI 48232-0621) and attach a statement explaining the late filing. The IRS will not impose a penalty for the failure to file the delinquent FBARs if there are no underreported tax liabilities and the FBARs are filed by August 31, 2011. Note however, that the IRS is requiring FBARs for the 2010 calendar year to be filed by their June 30, 2011 due date. The IRS has not extended the 2010 FBAR due date to August 31, 2011 under the initiative.
In summary, the IRS will not impose a penalty for the failure to file certain tax information returns if there are no underreported tax liabilities and the delinquent information returns are filed by August 31, 2011. The IRS announcement concerning the Offshore Voluntary Disclosure Initiative and the related Frequently Asked Questions can be found on the IRS website. Given the potential penalty exposure, we recommend that any organization not in compliance with the foreign information return requirements use this opportunity to become compliant.
If you have any questions as to how the IRS’s Offshore Voluntary Disclosure Initiative applies to you, or if you would like Schneider Downs to assist you with your offshore reporting and compliance requirements, please contact Ron Kramer at 412-697-5356.
Schneider Downs provides accounting, tax, wealth management, technology and business advisory services through innovative thought leaders who deliver the expertise to meet the individual needs of each client. Our offices are located in Pittsburgh, PA and Columbus, OH.
This advice is not intended or written to be used for, and it cannot be used for, the purpose of avoiding any federal tax penalties that may be imposed, or for promoting, marketing or recommending to another person, any tax-related matter.