IRS Announces New Voluntary Disclosure Program

On February 8, 2011, the U.S. Internal Revenue Service (IRS) announced a special voluntary disclosure initiative designed to bring offshore funds back into the United States tax system. The deadline for participation in the program is August 31, 2011. Internal Revenue Commissioner Douglas Shulman calls this new initiative "the last, best chance for people to get back into the system."

The new program comes on the heels of the first initiative (the 2009 Offshore Voluntary Disclosure Program or "2009 OVDP"), announced in March 2009, which resulted in more than 15,000 voluntary disclosures before ending in October 2009. Since that date, more than 3,000 additional taxpayers have come forward making disclosures to the Internal Revenue Service with respect to their offshore foreign arrangements.

The Internal Revenue Service's new program, formally titled the "2011 Offshore Voluntary Disclosure Initiative" (2011 OVDI), includes a penalty structure that is higher than the earlier program, covers more years (2003–2010) and has a deadline (August 31, 2011) that some taxpayers may simply not be able to meet for reasons beyond their control.

The Internal Revenue Service has posted online frequently asked questions and answers about the 2011 OVDI.

The IRS's 2011 Offshore Voluntary Disclosure Initiative has the following general components:

A penalty equal to 25 percent of the amount held in foreign accounts/entities or value of foreign assets in the year with the highest aggregate asset value covering the periods 2003 through 2010. A reduced penalty of 12.5 percent for those situations where the taxpayer's foreign assets did not exceed $75,000 in any calendar year covered by the program. A 5-percent penalty for taxpayers who did not open the foreign account and for foreign residents who were unaware they were U.S. citizens. The filing of original and amended tax returns and the payment of taxes, interest and an accuracy-related penalty no later than August 31, 2011. Why a Second Offshore Initiative, and Why Should a Taxpayer Participate?

According to the Internal Revenue Service, the 2009 OVDP demonstrated the value of a uniform penalty structure for taxpayers who came forward voluntarily and reported their previously undisclosed foreign accounts and assets. The program offered a consistency and predictability to taxpayers in determining the amount of tax and penalties they faced and also enabled the Internal Revenue Service to centralize the civil processing of offshore voluntary disclosures. The 2009 OVDP ended October 15, 2009, with some 15,000 taxpayers participating in the program. The Internal Revenue Service has recently determined that a similar initiative should be available to the large number of taxpayers with offshore accounts and assets who applied after the October 15, 2009, deadline. The IRS's 2011 Offshore Voluntary Disclosure Initiative is available to taxpayers who come forward and complete all requirements on or before August 31, 2011.

The 2011 OVDI is consistent with the Internal Revenue Service's long-standing voluntary disclosure practice. When a taxpayer makes a truthful, timely and complete disclosure of the taxpayer's noncompliance, the Internal Revenue Service will not recommend criminal prosecution to the U.S. Department of Justice. Taxpayers who do not submit a voluntary disclosure run the risk of detection by the Internal Revenue Service and the imposition of substantial penalties including the civil fraud penalty and various foreign information return penalties. All of these penalties are in addition to the risk of criminal prosecution.

There is now a significant risk of the Internal Revenue Service discovering taxpayers' compliance shortcomings relative to their offshore financial arrangements. The Internal Revenue Service has increased its investigation of the foreign financial activities of U.S. taxpayers. Information regarding U.S. taxpayers' foreign activities becoming more readily available to the Internal Revenue Service through tax treaties, whistleblowers and the recently-enacted Foreign Account Tax Compliance Act (FATCA) and the reporting requirements for foreign financial assets under the new Internal Revenue Code section 6038D. In addition, the Internal Revenue Service has confirmed it has expanded its investigation of foreign banks far beyond UBS, to other banks (large and small) in Europe, the Middle East and Asia.

Who Is Eligible for the IRS's 2011 Offshore Voluntary Disclosure Initiative?

The new initiative applies to both individuals and entities who make a "timely," complete and accurate disclosure.

All voluntary disclosures, whether under traditional voluntary disclosure principles or the 2011 OVDI, must be "timely"—i.e., the disclosure must be made before the Internal Revenue Service becomes aware of the taxpayer's noncompliance. Taxpayers who are currently under civil examination, regardless of whether it relates to undisclosed foreign accounts or foreign entities, are not eligible for the 2011 OVDI. Similarly, taxpayers under criminal investigation by the Internal Revenue Service's Criminal Investigation division are also ineligible. The mere fact that the Internal Revenue Service has issued a John Doe summons seeking information that may identify a taxpayer as holding an undisclosed foreign account does not disqualify the taxpayer from this initiative. However, once the Internal Revenue Service obtains information under the John Doe summons that provides evidence of a specific taxpayer's noncompliance, that particular taxpayer may become ineligible for participation in the program.

Pre-clearance and Preliminary Acceptance

Taxpayers who desire to be advised whether their disclosure would be "timely" should make a request for "preclearance" before...