The IRS, February 8, 2011, announced a new 2011 Voluntary Disclosure Initiative (OVDI) for taxpayers to disclose their unreported offshore accounts. To participate in the OVDI, taxpayers must file or amend their tax returns and Form TD F 90-22.1 (Report of Foreign Bank and Financial Accounts (FBAR)) and pay all delinquent taxes, interest and penalties by August 31, 2011. The initiative covers tax years 2003 through 2010.
In exchange for participating in the OVDI, taxpayers with undisclosed offshore accounts can avoid criminal prosecution for their unpaid taxes and may be subject to significantly reduced penalties. [Generally, the civil penalty for willfully failing to file an FBAR can be as high as the greater of $100,000 or 50 percent of the total balance of the foreign account per violation. See 31 U.S.C. § 5321(a)(5).]
Under the OVDI, taxpayers will be subject to a 25 percent penalty on the highest aggregate account balance on their undisclosed account(s) between the 2003 and 2010. If the value of the undisclosed account(s) was less than $75,000 at all times during the tax years in question, the penalty is reduced to 12.5 percent. Moreover, in limited situations, a penalty of 5% may be imposed.
This is the second amnesty offer from the IRS for taxpayers with unreported income from offshore accounts. The first amnesty period ended on October 31, 2009, and produced roughly 15,000 disclosures to the IRS. Participants were subject to a 20 percent penalty rate covering a six-year window.
IRS Commissioner Shulman has described the 2011 OVDI as “the last, best chance for people to get back into the system.”
Eligibility. The OVDI is open to taxpayers, including individuals, corporations, partnerships and trusts. Taxpayers under examination or under criminal investigation, however, are ineligible to participate in the program.
Taxpayers that have made “quiet disclosures” by filing amended returns and paying related tax and interest for previously unreported offshore income without otherwise notifying the IRS are encouraged to participate in the OVDI. Taxpayers that make quiet disclosures without seeking the protection of the OVDI run the risk of being examined and potentially criminally prosecuted for all applicable years.
Deadline. The OVDI will be available to taxpayers that come forward and complete all requirements on or before August 31, 2011. Therefore, taxpayers looking to take advantage of the amnesty period should act quickly as it likely will take some time to obtain the requisite documentation from offshore financial institutions and to prepare an accurate disclosure to the IRS.