Voluntary Disclosure of Offshore Accounts - "Round 2"
Steve D'Amato, CPA, Tax Senior Manager email
March 2011
On February 8, 2011, the IRS announced that taxpayers will have the opportunity to participate in a new voluntary disclosure initiative for reporting the details and nature of undisclosed foreign and offshore accounts. This is the second such initiative by the IRS in the past two years. The new initiative, named the 2011 "Offshore Voluntary Disclosure Initiative" (OVDI), is designed to identify all aspects of these offshore accounts. The objective of this OVDI program is to allow taxpayers to disclose these accounts, report the income from the accounts and get current with their tax obligations.
The IRS implemented OVDI in response to the continuing interest from taxpayers and practitioners who wanted to disclose their foreign accounts after the IRS's first voluntary disclosure program, the 2009 "Offshore Voluntary Disclosure Program" (OVDP). The OVDP ended on October 15, 2009. In this 2009 program, taxpayers voluntarily disclosed more than 15,000 foreign accounts covering more than 60 countries. Since the October 15, 2009, deadline of OVDP, more than 3,000 taxpayers have come forward to disclose their offshore accounts with IRS even without a formal program. The announcement of the OVDI program may be welcome news for affected taxpayers, as they will now be able to take advantage of the new initiative.
The penalties of the new initiative are higher than those of the 2009 program. Taxpayers participating in the new initiative will be subject to a penalty of 25 percent on the highest aggregate account balance for all their offshore accounts since 2003. Taxpayers participating in the 2009 program (which also applied to the period back to 2003) were subject to a 20 percent penalty. Taxpayers who did not disclose their accounts through OVDP will pay a higher penalty now through OVDI.
Also, under OVDI there is a new 12.5 percent penalty category for smaller accounts. This lower rate is the penalty for taxpayers whose offshore accounts or assets do not exceed $75,000 for any tax year covered by the new initiative. Further, in certain situations, taxpayers may qualify for a lower 5 percent penalty.
Participants of the new initiative must file all original and amended tax returns for up to eight tax years (2003 through 2010), along with the payment of all the related taxes, interest and penalties. The application to be a participant in ODVI and the filing of these amended tax returns must all be done by August 31, 2011.
These reporting rules have been in place for years, but in recent years, it has become a major focus of the IRS to crack down on undisclosed foreign and offshore accounts. This new initiative imposes some rather significant penalties on taxpayers who disclose their offshore accounts. However, taxpayers who continue to hide their offshore assets will likely be subject to even higher penalties and possible criminal prosecution. The IRS was reluctant to move forward with this second round of voluntary disclosures, and it is anticipated this is the last such IRS program for many years (affected taxpayers should not expect a "Round 3" anytime soon). Taxpayers with previously undisclosed foreign accounts should consult with their tax adviser now about OVDI.
Although the IRS has announced OVDI, they are still developing guidance on the program. The IRS has added a section to its website that provides up-to-date information on the new initiative. This section includes the new initiative's full terms and conditions, as well as helpful question and answer sections for both taxpayers and tax practitioners. It can be found at: http://www.irs.gov/newsroom/article/0,,id=234900,00.html.
The reporting rules for foreign accounts can be complex. Many unsuspecting parties may have filing requirements and tax liabilities that they are unaware of, so take time now to evaluate your situation and monitor the August 31, 2011, deadline. If you have questions or would like more information on the 2011 Offshore Voluntary Disclosure Initiative, please contact your Kolb+Co. adviser or Steven D'Amato at sdamato@kolbco.com.
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Related Item: Guidance Issued on FBAR Reporting. On February 23, the Treasury Department's Financial Crimes Enforcement Network (FinCEN) issued final regulations on the Report of Foreign Bank and Financial Accounts (FBAR). The final regulations, which are effective March 28, 2011, and apply to 2010 reports required to be filed by June 30, 2011 (and for subsequent years). Further, these final regulations largely adopt the proposed regulations issued on February 26, 2010, with several slight modifications and clarifications. It addresses the scope of persons who are required to file FBARs and the types of accounts that are reportable. It also provides filing relief, in the form of exemptions for certain persons with signature or other authority over the accounts, and adopts provisions intended to prevent persons subject to the rule from avoiding their reporting requirements. Click here for these final regulations published in the Federal Register.