U.S. taxpayers hiding income in undisclosed offshore accounts are running out of time to take advantage of the soon-to-expire opportunity to come forward and bring their taxes and reporting requirements current with the Internal Revenue Service (IRS).
The IRS’s2011 Offshore Voluntary Disclosure Initiative (OVDI) will expire on August 31, 2011. Under the OVDI, taxpayers who come forward voluntarily get a better deal than those who wait for the IRS to find their undisclosed accounts and income. Taxpayers hiding assets offshore who do not come forward will face far higher penalties, along with potential criminal charges if detected by the IRS. The 2011 OVDI is the second voluntary disclosure program offered by the IRS. The 2009 program closed on October 15, 2009.
Under the 2011 initiative, the penalty framework requires individuals to pay a penalty of 25 % of the amount in the foreign bank accounts in the year with the highest aggregate account balance covering the 2003 to 2010 time period. Some taxpayers will be eligible for a lower 5% or 12.5% penalty in certain circumstances.
Taxpayers electing to participate in the OVDI must pay back taxes and interest for up to eight years (2003 to 2010) as well as paying accuracy-related and/or delinquency penalties. All original and amended tax returns must be filed by the August 31 deadline. If a taxpayer cannot fully comply with the OVDI submission requirements by August 31, 2011, an extension of up to 90 days may be granted by the IRS, if requested on or before August 31, 2011(see FAQ 25.1).
Further details about the OVDI are provided in a series of questions and answers at http://www.irs.gov/newsroom/article/0,,id=234900,00.html
The IRS is continuing its efforts to identify foreign banks that help U.S. taxpayers to hide assets offshore and to seek information on those taxpayers. In addition, new reporting requirements under the Foreign Account Tax Compliance Act (FATCA) are designed to close the gap on the ability of the Treasury to determine the ownership of U.S. assets in foreign accounts. Thus, it will become increasingly harder to hide assets and income offshore and avoid detection by the IRS.
The OVDI also allows taxpayers who have previously reported all income related to foreign accounts but are delinquent in filing certain foreign information returns related to those accounts to get current with these filings. Those taxpayers will also have until August 31, 2011 to file the forms and avoid delinquent return penalties.
These forms would include the following:
• Form TD F 90-22.1 – Report of Foreign Bank and Financial Accounts (FBAR)
• 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.
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 to avoid exposure to substantial civil and criminal penalties, and will generally eliminate the risk of criminal prosecution. This program is only available until August 31, 2011. The IRS might not give taxpayers a third bite of the apple by further extending the OVDI.
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 a Schneider Downs tax services representative.
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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.
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