The IRS and the Department of Justice have publicized several high profile prosecutions to remind U.S. taxpayers of the risk of failing to report offshore accounts. If you hold accounts in foreign countries, or have stock in or signatory authority over entities that do, you should know that the IRS recently renewed its program for reporting those interests. The 2011 Offshore Voluntary Disclosure Program builds upon a similar program that expired in October 2009, to encourage disclosure of unreported offshore interests by offering reduced civil penalties and greatly reduced risk of criminal prosecution.

U.S. citizens and resident aliens must report all worldwide income. This includes interest and dividends from foreign bank accounts and securities, as well as rental income from foreign real estate or other business operations. Even if the assets are held within a corporation, the owners could still have U.S. taxable income.

Persons with authority to sign on a foreign bank account must check a box on Schedule B of their personal tax return, and file a Report of Foreign Bank and Financial Accounts (FBAR) statement describing the account. This rule applies even to those persons who do not own the account, such as corporate officers.

The latest voluntary disclosure program allows taxpayers not currently under audit, who disclose their accounts and who agree to cooperate fully with the IRS civil and criminal divisions, to settle generally on the following terms:

  • Assessment of taxes for the years 2003 through 2010, even if the accounts were established prior to 2003. The taxpayer must file amended returns and the FBAR statements for any such accounts.  
  • Assessment of penalties on unpaid taxes at the accuracy related rate (20%) rather than much higher rates that apply to civil fraud or other enforcement actions.  
  • FBAR penalties reduced to 25% of the highest account balance or eliminated altogether. 
  • Recommendation of no criminal prosecution.

This voluntary disclosure program expires on August 31, 2011.