expected, the Internal Revenue Service (IRS) has announced another
opportunity for U.S. taxpayers to voluntary disclose previously undisclosed
foreign financial accounts, thereby likely avoiding criminal prosecution and
significantly reducing civil penalties.
The new offshore voluntary disclosure initiative, although not as favorable
as the previous program, is perhaps the last, best opportunity for such persons
to come forward voluntarily. It also gives taxpayers who participated in the
2009 offshore voluntary disclosure program and believe they qualify for either
the 5% penalty or 12.5% penalty available under the new initiative, an
opportunity to request that the IRS consider their eligibility for such a
Building on the IRS’s first reduced-penalty Offshore Voluntary Disclosure
Program that ended in October 2009 (2009 OVDP), the new 2011 Offshore Voluntary
Disclosure Initiative (2011 OVDI) is intended to bring offshore money back into
the U.S. tax system, and according to IRS Commissioner Douglas Shulman, give
those with money in undisclosed foreign accounts “a tough, fair way to resolve
their tax problems once and for all” before the IRS finds them.
According to Shulman, “[c]ombating international tax evasion is a top
priority for the IRS,” with the IRS devoting significant additional resources to
track down unreported overseas accounts of U.S. taxpayers – including ongoing
investigations of numerous foreign banks that service such accountholders.
Terms of the Initiative
Under the 2011 OVDI, taxpayers generally can avoid the risk of criminal
prosecution and the imposition of significantly higher civil and criminal
penalties if, on or before Aug. 31, 2011, they disclose all of their previously
undisclosed foreign financial accounts and:
- File or amend federal income tax returns for all tax years covered by the
voluntary disclosure, generally calendar years 2003 through 2010 (covered
- File or amend offshore-related information returns (including Form TD
90-22.1, Report of Foreign Bank and Financial Accounts (FBAR)) for the covered
- Cooperate in the voluntary disclosure process, and with respect to the
covered years, agree to: (1) pay all unpaid taxes (and interest with respect
thereto); (2) pay an accuracy or delinquency penalty on the overdue tax; and (3)
in lieu of all other penalties that may apply, pay a penalty equal to 25% (or in
limited cases, 12.5% or 5%) of the highest aggregate balance held in the account
during the covered years (FBAR Penalty).
In contrast, under the 2009 OVDP, a U.S. person had to cooperate fully with
the IRS and: (1) file or amend federal income tax returns going back six years
(not eight years); (2) file or amend FBARs going back six years (not eight
years); and (3) pay a 20% (not 25%) FBAR Penalty (or in limited cases, 5%) on
the highest aggregate balance held in the account during such six-year period
(in addition to paying all unpaid taxes and an accuracy or delinquency penalty
on the overdue tax).
Notably, eligibility for the 12.5% FBAR Penalty is limited to certain
taxpayers whose foreign account never had a balance greater than $75,000,
whereas eligibility for the 5% FBAR Penalty is generally limited to: (1)
taxpayers who are foreign residents and were unaware they were U.S. citizens;
and (2) taxpayers who essentially inherited foreign accounts that were minimally
used, and for which the taxpayer can establish that all applicable U.S. taxes
have been paid on funds deposited to such accounts.
The eligibility terms for the 5% FBAR Penalty under the 2011 OVDI, although
still stringent, represent a much welcome lower threshold than the 5% FBAR
Penalty under the 2009 OVDP, under which the IRS effectively required taxpayers
to establish that they did not know the foreign account existed (a near
impossibility for most affected taxpayers). With this key change and the more
expansive and detailed guidance released by the IRS in connection with the 2011
OVDI, it is clear that the IRS listened to and addressed many of the concerns
and issues raised by taxpayers who participated in the 2009 OVDP.
The 2011 OVDI sets forth procedures for taxpayers who participated under the
2009 OVDP and believe they qualify for either the 5% penalty or 12.5% penalty of
the 2011 OVDI, an opportunity to request the IRS to consider their eligibility
for such a reduced penalty.
As before, in the absence of complying with the 2011 OVDI, a U.S. person’s
non-willful violation of the requirement to disclose his or her interest in an
applicable foreign financial account through the filing of an FBAR could result
in a civil penalty up to $10,000 per violation; whereas a willful violation
could result in a civil penalty equal to the greater of $100,000 or 50% of the
balance in the account at the time of the violation. These penalties are in
addition to any criminal penalties relating to their income tax returns (e.g.,
filing a false return), including fines and imprisonment that could apply.
Who Should Participate in the 2011 OVDI?
In short, any U.S. person, whether residing in the United States or abroad,
who has a financial interest in or signature authority over any financial
account in a foreign country, is required to file an FBAR disclosing their
interest in such accounts, if the aggregate value of these accounts exceeds
$10,000. Therefore, if you are a U.S. person with such an interest or signature
authority over a foreign financial account during the covered years, and you
have not previously filed an FBAR with respect to such account, you should
strongly consider taking advantage of the 2011 OVDI.
Taxpayers who participated in the 2009 OVDP and believe they qualify for
either the 5% or 12.5% FBAR Penalty of the 2011 OVDI should request the IRS to
consider their eligibility for such a reduced penalty.
Filing a Voluntary Disclosure under the 2011 OVDI
In general, a timely letter which: (1) encloses complete and amended tax
returns and FBARs for the covered years; (2) reports legal source income omitted
from the original returns; and (3) offers to pay the tax, interest, and any
penalties determined by the IRS to be applicable, constitutes a voluntary
disclosure for purposes of the 2011 OVDI.
Given the high stakes involved and the amount of time it can take to obtain
the foreign financial records necessary to make a voluntary disclosure by the
Aug. 31, 2011 deadline, U.S. taxpayers who would like to take advantage of the
2011 OVDI should get started immediately. We have assisted numerous individuals
and companies in complying with their FBAR obligations and the tax and
information reporting requirements associated therewith.
Please do not hesitate to contact any of us or any member of the McGuireWoods
Tax Controversy Team if you would like additional information on your options
for reporting a previously undisclosed foreign financial account.