IRS Announces Second Special Voluntary Disclosure Initiative For Offshore Accounts

On February 8, the Internal Revenue Service (IRS) announced a new penalty framework allowing taxpayers to voluntarily disclose previously unreported offshore accounts and entities. The program generally provides for exemption from criminal prosecution and a significant reduction in civil penalty exposure for U.S. taxpayers who choose to voluntarily participate in the program.1 The program is only applicable to those who complete all requirements on or before August 31, 2011. For those considering participating in this program, now is the time to act, as it will likely take several months to obtain all required foreign records and have tax returns completed. Any decision not to come forward at this time should be weighed against the potential for higher monetary penalties, the risk of criminal charges, and the likelihood that one or more foreign banks will have customer data turned over to the IRS in the next year.

The newly announced IRS program, titled the 2011 Offshore Voluntary Disclosure Initiative (2011 OVDI), requires participating taxpayers to file or submit amended tax and information returns, including Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (FBAR). Qualifying taxpayers must pay (i) all taxes and interest due from 2003 to 2010, (ii) either an accuracy or delinquency penalty for each year on the amount of additional tax due, and (iii) a penalty equal to 25% of the amount in the foreign bank accounts in the year with the highest aggregate account balance during the period from 2003 to 2010.2 The 25% penalty may be reduced to 12.5% for taxpayers whose offshore accounts or assets did not surpass $75,000 in any calendar year covered by the program, or to as low as 5% in a certain very limited class of cases.

The current program comes on the heels of the IRS's prior voluntary disclosure program, and demonstrates the U.S. government's continued focus on offshore accounts and tax evasion. The prior voluntary disclosure program attracted approximately 15,000 participants before it closed on October 15, 2009. After that program closed, more than 3,000 taxpayers came forward to make voluntary disclosures without the benefit of a set civil penalty program.3 Information related to the identity of those with undisclosed foreign accounts is increasingly available to the IRS under tax treaties and information sharing agreements with foreign governments, and is expected to become more readily available as the result of...