The IRS has announced a second voluntary disclosure initiative designed to encourage taxpayers who have earned income from offshore assets and bank accounts to come forward and potentially avoid criminal prosecution. Taxpayers would also potentially avoid greater penalties (and interest on such penalties) for all years in which they maintained offshore assets and bank accounts.

Taxpayers who choose to comply with the voluntary disclosure plan will be required to pay any unpaid taxes, interest and penalties for the last eight years, and also pay a special 25% penalty in lieu of any other penalties that might otherwise apply. The new voluntary disclosure initiative will be available through August 31, 2011.

Background

The IRS instituted a voluntary disclosure program for reporting offshore income in 2009, which resulted in about 15,000 taxpayers coming forward. Due to the success of the 2009 program, the IRS decided to provide a second voluntary disclosure program. The penalties imposed by the second program, however, are higher than those imposed under the 2009 program so that taxpayers who did not come in through the 2009 program will not be rewarded for waiting.

Applicability

The terms of the program are applicable only to taxpayers who submit voluntary disclosure requests and who fully cooperate with the IRS, both civilly and criminally. This includes providing information on offshore financial accounts, institutions and facilitators. Taxpayers must also submit full payment of tax, interest, accuracy-related penalties and, if applicable, the failure to file and failure to pay penalties, as well as submit all required documents, by the August 31 deadline. Taxpayers who are already under civil or criminal examination are ineligible.

IRS Criminal Investigation will review each taxpayer's voluntary disclosure first to determine if he or she is eligible and, if so, will assign each case to a civil examiner for processing.

Eight-Year Look Back Period

The IRS will require taxpayers to pay all taxes and interest due for the 2003-2010 period. The IRS will also require taxpayers to file or amend all returns, including information returns and IRS Form TD F 90-22.1 (Report of Foreign Bank and Financial Accounts).

Accuracy and Delinquency Penalties

The IRS will require taxpayers to pay (i) accuracy-related penalties equal to 20% of the full amount of their underpayments of tax for the past eight years; (ii) failure to file penalties up to 25%; and (iii) failure to pay penalties, up to 25%.

Miscellaneous Penalty

In addition to the penalties described above, the IRS will require taxpayers to pay an additional penalty equal to 25% of the amount in foreign bank accounts or entities in the year within the last eight years with the highest aggregate account or asset value. This penalty may be reduced to either 5% or 12.5% if the taxpayer meets certain criteria.

Cautionary Note

After applying all of the taxes, interest and penalties described above, it is possible that the amount that the IRS may require the taxpayer to pay can potentially be greater than the amount that is in the account.