This One Minute Memo® is intended to inform taxpayers of a limited time opportunity to report previously undisclosed offshore accounts and unreported income to the Internal Revenue Service under a special penalty framework. We recommend that taxpayers with undisclosed offshore accounts and unreported income consider applying under this 2011 Offshore Voluntary Disclosure Initiative (the “OVDI”), as we anticipate increased activity by the IRS in ferreting out the identities of persons with undisclosed foreign accounts and the enforcement and increased severity of penalties in this area.

Background

On March 23, 2009, the IRS announced an Offshore Voluntary Disclosure Program (“OVDP”) setting forth a reduced penalty structure for voluntary disclosures by taxpayers of previously unreported income and offshore accounts. The OVDP terminated on October 15, 2009 with close to 15,000 taxpayers participating in the program.

Until announcement of the OVDI, taxpayers who failed to participate in the OVDP were in limbo in deciding how to come back into compliance with their U.S. federal income tax reporting obligations. A taxpayer could always make a voluntary disclosure without a special program in place, but uncertainty existed with respect to how the taxpayer’s situation would be resolved.

Summary of the Initiative

Under the OVDI, eligible taxpayers and the IRS agree to the following:

  • The taxpayer must file or amend all federal income tax returns and offshore related information returns (including Form TD F 90-22.1, commonly known as an “FBAR”) for all tax years covered by the voluntary disclosure (generally 2003 through 2010);  
  • The taxpayer is subject to an OVDI penalty of 25 percent (or in limited cases, 12.5% or 5%)1 of the highest aggregate balance in foreign bank accounts/entities or value of foreign assets during the period covered by the voluntary disclosure.  
  • The taxpayer must enter into a closing agreement and agree to pay all back taxes, interest, a 20% accuracy-related penalty, any failure to pay or file penalties and the OVDI penalty (described above) or make good faith arrangements with the IRS for such payment.  

Taxpayers who are interested in participating must submit applications to the IRS no later than August 31, 2011.

Persons Affected

Any taxpayer (including legal entities) with undisclosed offshore accounts or unreported income from foreign sources may be eligible to participate in the OVDI.

Reasons to Participate

Taxpayers eligible to participate in the OVDI who do not submit a voluntary disclosure run the risk of detection by the IRS and the imposition of substantial penalties, including fraud, the foreign information return penalties and criminal prosecution. A voluntary disclosure enables them to reduce civil penalties and generally eliminate any risk of criminal prosecution.

Conclusion

Taxpayers with undisclosed offshore accounts or unreported foreign earnings should seek advice of counsel in determining whether or not to participate in the OVDI. Some taxpayers may be ineligible to participate. However, while the OVDI offers some level of certainty in terms of coming forward when reporting offshore accounts, it may not be appropriate for every taxpayer. Since the failure to report offshore accounts carries potential criminal liability, taxpayers should only share information related to offshore accounts with legal counsel in making this decision. Only communications with a lawyer are protected under the attorney-client privilege in criminal tax matters.