The IRS announced today a new voluntary disclosure program for taxpayers who have previously not disclosed offshore financial holdings. The program, which expires August 31, 2011, provides for reduced, although still stiff penalties for those who come forward, and offers as an additional inducement, the likelihood that those who do come forward voluntarily will not be prosecuted criminally. In order to take advantage of the program, the IRS must not already be aware of the taxpayer through other means, such as an audit or ongoing investigation. The non-prosecution aspect of the program is not a guarantee, although most taxpayers who qualify for the program will not be prosecuted. A similar program that ended on October 15, 2009 resulted in 13,000 voluntary disclosures being made, according to the IRS. An additional 3,000 taxpayers have come forward voluntarily since that date. Those 3,000 will be covered by the new program.

The new voluntary disclosure program provides that most taxpayers will pay a penalty of 25% of their highest undisclosed balance for the past eight years and will be required to file back taxes and interest for those eight years. If the Examination Division of the IRS reacts to this program as it did to the previous program, those taxpayers who come forward should expect an audit-like scrutiny of their tax returns. Taxpayers whose offshore balances did not exceed $75,000 will probably have their penalty limited to 12.5% of their highest balance.

While the conditions laid out are not pleasant, the IRS has already prosecuted criminally scores of taxpayers who did not come forward voluntarily in the past. Many banks are now cooperating with the IRS and disclosing their customer lists. Some taxpayers may have been under the assumption that only UBS clients were at risk, but events of the past two years have shown that customers of many banks in many countries – not just Switzerland - should seriously consider making a voluntary disclosure.