On February 8, 2011, Internal Revenue Service (IRS) Commissioner Douglas Shulman announced a new (second) special voluntary disclosure initiative designed to encourage U.S. persons who still have unreported income from undisclosed offshore accounts or entities to bring their accounts and income into compliance with U.S. tax laws (IR-2011-14). The new amnesty program, 2011 Offshore Voluntary Disclosure Initiative (OVDI), will allow U.S. persons to become current with their taxes and to avoid higher penalties or the possibility of criminal prosecution by following special procedures that will be available to them through August 31, 2011.
The IRS also announced that the new program will allow taxpayers who have previously reported all income related to foreign accounts and are delinquent in filing certain foreign information returns related to those accounts to be current with these filings. Taxpayers will have until August 31, 2011 to file the forms and avoid delinquent return penalties.
The 2009 Voluntary Disclosure Program
The IRS offered its first voluntary disclosure program for offshore accounts from April through October 2009. The program generated approximately 15,000 voluntary disclosures and raised about $400 million from the 2,000 or so cases that have been completed so far. The 2009 amnesty program was much more successful than originally anticipated. The IRS has indicated that since October 2009, another 3,000 taxpayers have come forward on their own to disclose previously unreported foreign accounts. In light of the success of the first amnesty program and the well-publicized efforts by the IRS in the foreign bank account arena, the IRS is optimistic that this second amnesty program will elicit a large response from remaining delinquent U.S. taxpayers. In announcing OVDI, IRS Commissioner Shulman said:
“As we continue to amass more information and pursue more people internationally, the risk to individuals hiding assets offshore is increasing. This new effort gives those hiding money in foreign accounts a tough, fair way to resolve their tax problems once and for all. And it gives people a chance to come in before we find them.”
Combating international tax evasion is a top priority of the IRS and they have many cases and foreign banks under review to detect U.S. taxpayers hiding assets and income offshore.
The 2011 Offshore Voluntary Disclosure Initiatve (OVDI)
Generally, the mechanism for reporting a U.S. person’s interest in a foreign account is Treasury Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts, referred to as FBAR. The IRS’s voluntary disclosure program for reporting income related to FBARs and other foreign information returns that have not been filed includes:
The program is not available to taxpayers that made voluntary disclosure under the 2009 program.
- The program is available to those taxpayers who have made voluntary disclosure to the IRS since the 2009 program ended, and those that have made “quiet disclosure” of their delinquent accounts (see below).
- A new penalty framework will apply for voluntary disclosures that are true, timely, and complete and presented with full cooperation of taxpayers in all areas, including payment.
- Provides assurance that those taxpayers who qualify will not be subject to criminal or civil fraud penalties.
- Establishes a specific set of procedures and guidelines for how disclosures will be handled which expire on August 31, 2011.
- Covers the 8 year period of 2003 to 2010.
There are two scenarios that may apply under the OVDI program.
1. Failure to file FBAR (or other information returns) and to report and pay tax on foreign income:
- File eight years (2003 to 2010) of amended or delinquent tax returns and FBARs (or other information returns) by August 31, 2011.
- Pay all taxes and interest due for the eight years.
- Pay a 20% accuracy penalty and up to a 25% delinquency penalty on tax due.
- Pay a one-time 25% penalty in the year with the highest aggregate account balance (in certain circumstances this penalty may be reduced to 5% or 12.5%)
2. Failure to file an FBAR (or other information returns) only:
- Assumes all income from foreign accounts has been reported and taxes have been paid.
- Taxpayers should file delinquent FBARs (or other information returns) and attach an explanation for the late filing by August 31, 2011.
- IRS will not impose a penalty for the failure to file the delinquent FBARs (or other information returns).
- Note: The IRS makes clear that the 2010 FBAR is due and should be filed by June 30, 2011, and not by the August 31, 2011 program deadline.
Quiet Disclosures of Offshore Assets
Rather than formally applying to participate in a voluntary disclosure program, some taxpayers have filed amended returns reporting previously undisclosed assets and income. The IRS refers to this procedure as a “quiet disclosure of offshore assets.” The IRS is reviewing amended returns it receives to detect this practice. The IRS has cautioned that if it discovers evidence of criminal behavior in these amended returns, then it will recommend criminal prosecution. The IRS reiterated in new frequently asked questions regarding the program (FAQs; Q.15 and 16) that taxpayers who make quiet disclosures will not escape penalties and possible criminal prosecution.
Those taxpayers whose “quiet disclosure” returns have not yet been selected for examination by the IRS are eligible for and may request to participate in the OVDI. These taxpayers must otherwise meet all of the criteria for participation in the program.
Penalties for Failure to File Certain Information Returns Other Than FBAR
The IRS indicates that taxpayers who have failed to file tax information returns other than FBARs, but who have reported and paid tax on all transactions related to the information returns should file these information returns by August 31, 2011. If outlined procedures are followed, the IRS will not impose a penalty for the failure to file delinquent information returns.
Such other information returns would include:
- Form 5471- Information Return of U.S. Persons with Respect to Certain Foreign Corporations
- Form 5472- Information Return of a 25% Foreign-Owned U.S. Corporation Engaged in a U.S. Trade or Business
- Form 926- Return by a U.S. Transferor of Property to a Foreign Corporation
- Form 3520- Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts
- Form 3520A- Annual Information Return of Foreign Trust with a U.S. Owner
- Form 8865- Return of U.S. Persons with Respect to Certain Foreign Partnerships
The OVDI program outlines procedures to be followed to correct the delinquency of any of these forms for the 2003 through 2010 filing periods. Nonfiling of these information returns can result in substantial penalties.
Sources of Information
The IRS has released guidance on the OVDI program in the form of Frequently Asked Questions (FAQs). The original FAQs were released on February 9, 2011. Read the IRS’ separate set of FAQs concerning its OVDI program and the list of FAQs concerning FBARs.
FBAR Filing Requirement
U.S. persons with a financial interest in or signature or other authority over a foreign financial account may be required to file Form TD F 90-22.1 (Report of Foreign Bank and Financial Accounts) with the U.S. Treasury Department if the aggregate value of all such accounts of the U.S. person exceed $10,000 at any time during the calendar year. Completed FBARs for a calendar year must be received by the Treasury Department no later than June 30 of the following year. No extensions are available for this filing deadline and an extension of time to file federal income tax returns does not extend the due date for filing an FBAR.
Note: The IRS has advised us that they intend to issue final regulations on FBARs prior to the June 30, 2011 filing date. However, they would not advise us of the content of these pending regulations.
Penalities for Failing to File FBARs
A non-willful violation of the FBAR reporting requirements can result in a $10,000 penalty, subject to a reasonable cause defense. A willful violation can result in a penalty of the greater of $100,000 or 50% of the balance of the account at the time of the violation. Criminal penalties for willful violations can result in a fine of $250,000 and five years imprisonment, and if the violations are part of a pattern of illegal activity, a fine of $500,000 and ten years imprisonment.
Summary and Conclusions
Persons who have not properly reported income from foreign accounts for 2003 through 2010 should consider participating in the IRS Offshore Voluntary Disclosure Initiative. This program is available until August 31, 2011 and will help those taxpayers avoid exposure to substantial civil and criminal penalties, and will generally eliminate the risk of criminal prosecution. We would recommend that taxpayers finding themselves in this situation consult with tax counsel without delay.
Taxpayers having only delinquent reporting requirements should take advantage of procedures made available by the IRS to cure these delinquencies. These procedures are also available until August 31, 2011. The IRS will not impose a penalty for the failure to file the FBAR, or other foreign information returns, if the delinquent returns are filed by this date (except for the 2010 FBAR that should be filed by June 30, 2011).
If you have any questions as to how the IRS’s Offshore Voluntary Disclosure Initiative applies to you, or if you like Schneider Downs to assist you with your offshore reporting and compliance requirements, please contact a Schneider Downs tax services representative.
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.