IRS Announces Second Special Offshore Voluntary Disclosure Initiative

The Internal Revenue Service (IRS) announced on February 8, 2011 a special voluntary disclosure initiative designed to bring offshore money back into the US tax system and help individuals with undisclosed income from hidden offshore financial accounts get current with their taxes. The new voluntary disclosure initiative will only be available through August 31, 2011. This program allows individuals with previously unreported foreign financial accounts to significantly reduce their exposure to substantial civil tax penalties and, in many cases, to eliminate the potential of criminal prosecution. Foreign accounts include assets held in various offshore trusts, foundations, corporations and other entities.

This second special disclosure initiative follows the first 2009 Offshore Voluntary Disclosure Program (OVDP) which closed with 15,000 voluntary disclosures on October 15, 2009. Since that date, more than 3,000 taxpayers have come forward to the IRS with bank accounts from around the world. These taxpayers will also be eligible to take advantage of the special provisions of the new initiative.

The new initiative - called the 2011 Offshore Voluntary Disclosure Initiative (OVDI) - includes several changes from the 2009 program. The overall penalty structure for 2011 is higher, meaning that individuals who did not come in through the 2009 voluntary disclosure program will not be rewarded for waiting. However, the 2011 initiative does add new features.

For the 2011 initiative, there is a new penalty framework that requires individuals to pay a penalty of 25 percent of the amount in the foreign bank accounts in the year with the highest aggregate account balance covering the 2003 to 2010 time period. Some taxpayers will be eligible for 5 or 12.5 percent penalties. Participants also must pay back-taxes and interest for up to eight years as well as paying accuracy-related and/or delinquency penalties.

Taxpayers participating in the new initiative must file all original and amended tax returns and include payment for taxes, interest and accuracy-related penalties by the August 31, 2011 deadline. This a very aggressive deadline, which will be difficult to meet even for those who promptly make a voluntary disclosure.

The IRS is also making other modifications to the 2011 disclosure initiative.

Participants face a 25 percent penalty, but taxpayers in limited situations can qualify for a 5 percent penalty. The IRS also created a new penalty category of...

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