On January 9, 2012, the Internal Revenue Service (IRS) announced another opportunity for U.S. taxpayers to voluntarily inform the IRS of previously undisclosed foreign financial accounts in hopes of avoiding criminal prosecution and to reduce civil penalties.
This offshore voluntary disclosure program follows the closure of the 2009 and 2011 programs and is part of the IRS’s continued efforts to crack down on nondisclosure of foreign assets. The third program opens as the IRS continues its efforts with the Department of Justice to pursue criminal prosecution of international tax evasion. The program does not have any official submission deadlines. However, the IRS has the ability to change the program at any time which could include the imposition of higher penalties.
Background
Building on the IRS’s reduced-penalty Offshore Voluntary Disclosure Program in 2009 and 2011 that resulted in 33,000 submissions, the new Offshore Voluntary Disclosure Program (OVDP) is intended to provide an opportunity for taxpayers to become compliant with their tax filing obligations. According to IRS Commissioner Douglas Shulman, the program gives those with money in undisclosed foreign accounts a chance to volunteer the information because “people need to come in and get right with us before we find you. We are following more leads and the risk of people who do not come in continues to increase.” The first two programs resulted in the IRS collecting over $4.4 billion. The IRS expects to collect more as it completes its processing of the 2011 submissions.
Requirements Under New OVDP
Under the OVDP, taxpayers generally can avoid the risk of criminal prosecution and the imposition of significantly higher civil and criminal penalties if, 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 up to the last eight years (covered years).
- File or amend offshore-related information returns (including Form TD 90-22.1, Report of Foreign Bank and Financial Accounts (FBAR)) for the covered years.
- 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 27.5% (or in limited cases, 12.5% or 5%) of the highest aggregate balance held in the account during the covered years (FBAR Penalty).
The 27.5% penalty is an increase of 2.5% from the 2011 program. Notably, eligibility for the 12.5% FBAR Penalty is limited to certain taxpayers whose foreign account never had a balance greater than $75,000.
As before, in the absence of complying with the OVDP, 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. A U.S. person includes both U.S. citizens and resident aliens. 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 OVDP.
Filing a Voluntary Disclosure under the OVDP
In the coming months the IRS will release the more details about the new program. 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, U.S. taxpayers who would like to take advantage of the program should get started immediately. The McGuireWoods Tax Controversy Team has assisted numerous individuals and companies in complying with their FBAR obligations and the tax and information reporting requirements associated therewith.
The 2011 Offshore Voluntary Disclosure Initiative Frequently Asked Questions and Answers are available online. For related commentary, see our previous alerts:
- New IRS Voluntary Disclosure Program on the Horizon for U.S. Persons with Undisclosed Foreign Financial Accounts (1.27.2011)
- IRS Announces New Offshore Voluntary Disclosure Initiative for U.S. Persons with Undisclosed Foreign Financial Accounts (2.14.2011)
- New Guidance Regarding FBARs and Offshore Voluntary Disclosure Initiative (6.21.2011).
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.