The Internal Revenue Service (IRS) announced on February 8, 2011 a special voluntary disclosure initiative designed to bring offshore money back into the US tax system and help individuals with undisclosed income from hidden offshore financial accounts get current with their taxes. The new voluntary disclosure initiative will only be available through August 31, 2011. This program allows individuals with previously unreported foreign financial accounts to significantly reduce their exposure to substantial civil tax penalties and, in many cases, to eliminate the potential of criminal prosecution. Foreign accounts include assets held in various offshore trusts, foundations, corporations and other entities.
This second special disclosure initiative follows the first 2009 Offshore Voluntary Disclosure Program (OVDP) which closed with 15,000 voluntary disclosures on October 15, 2009. Since that date, more than 3,000 taxpayers have come forward to the IRS with bank accounts from around the world. These taxpayers will also be eligible to take advantage of the special provisions of the new initiative.
The new initiative - called the 2011 Offshore Voluntary Disclosure Initiative (OVDI) - includes several changes from the 2009 program. The overall penalty structure for 2011 is higher, meaning that individuals who did not come in through the 2009 voluntary disclosure program will not be rewarded for waiting. However, the 2011 initiative does add new features.
For the 2011 initiative, there is a new penalty framework that requires individuals to pay a penalty of 25 percent 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 5 or 12.5 percent penalties. Participants also must pay back-taxes and interest for up to eight years as well as paying accuracy-related and/or delinquency penalties.
Taxpayers participating in the new initiative must file all original and amended tax returns and include payment for taxes, interest and accuracy-related penalties by the August 31, 2011 deadline. This a very aggressive deadline, which will be difficult to meet even for those who promptly make a voluntary disclosure.
The IRS is also making other modifications to the 2011 disclosure initiative.
Participants face a 25 percent penalty, but taxpayers in limited situations can qualify for a 5 percent penalty. The IRS also created a new penalty category of 12.5 percent for treating smaller offshore accounts. Individuals whose offshore accounts or assets did not surpass $75,000 in any calendar year covered by the 2011 initiative will qualify for this lower rate.
The 2011 initiative offers clear benefits to encourage taxpayers to come in now rather than risk IRS detection. Taxpayers hiding assets offshore who do not come forward will face far higher penalty scenarios as well as the possibility of criminal prosecution. For certain taxpayers, absent this program the potential non-reporting penalties may substantially exceed the value of the offshore accounts.
In the first voluntary disclosure program in 2009, taxpayers faced up to a 20 percent penalty covering up to a six-year period. Taxpayers came forward with about 15,000 voluntary disclosures in that effort covering banks in more than 60 countries. This program has provided the IRS and the US Department of Justice with a wealth of information on banks and other financial institutions where undisclosed accounts have historically been located. Holders of undisclosed accounts should not assume that because their bank or financial institution has not been publicly identified as a target, they are not at risk. Unlike the 2009 Offshore Voluntary Disclosure Program, the IRS has not publicly identified the foreign financial institutions that it is targeting when announcing the current program.
SNR Denton has extensive experience related to the IRS offshore voluntary disclosure programs and has assembled a specialized team of tax, trusts and estates, regulatory and corporate lawyers, as well as civil and criminal tax litigators, to guide clients through the challenging process of working with the IRS and other government agencies in this matter. SNR Denton lawyers already represent numerous banks, financial institutions, fiduciaries and individual taxpayers in connection with the IRS voluntary disclosure program. SNR Denton lawyers are also actively representing those who are being investigated, prosecuted, or both by the IRS and US Department of Justice in connection with undisclosed offshore accounts.