IRS Announces Voluntary Disclosure Program Affecting U.S. Persons With Offshore Financial Accounts

Author:Mr Thomas Ostrander
Profession:Duane Morris LLP

On March 26, 2009, the Internal Revenue Service

("IRS") made public a program allowing U.S. persons with

foreign financial accounts to greatly reduce their exposure to

significant civil penalties and, in many cases, to eliminate the

prospects of criminal prosecution.

The program comes in the wake of UBS's admission to the

existence of some 50,000 accounts held by U.S. persons and of

increasing pressure on the IRS to deal with tax avoidance schemes

utilizing offshore financial structures.

Many U.S. persons with undisclosed offshore financial

arrangements have been hesitant to disclose them to the government

for fear of the multiple steep penalties that may apply to such

offshore financial accounts and arrangements. In many instances,

particularly where trusts or foreign corporations are involved, the

panoply of penalties may exceed the highest balance in the offshore


The new Penalty Framework for Voluntary Disclosure Requests

applies to all voluntary disclosure requests containing offshore

issues. It will apply to all pending voluntary disclosure requests

and will remain in effect until September 23, 2009. After a

preliminary determination by IRS Criminal Investigation that a

taxpayer is eligible for voluntary disclosure, all voluntary

disclosure requests will be sent to the Philadelphia Offshore

Identification Unit ("POIU") for civil processing.

The POIU is authorized to enter into closing agreements relative

to offshore issues in the following manner:

Assess all tax and interest going back six years unless the

account/entity was formed or acquired within the six-year period,

in which case the lookback period will start with the earliest year

in which the account/entity was formed/acquired;

File or amend all returns, including a Report of Foreign Bank

and Financial Account ("FBAR");

Assess an accuracy-related penalty or delinquency penalty on

all years (the reasonable-cause exception will not apply);

In lieu of all other penalties that may apply, including FBAR

and information return penalties, assess a penalty equal to 20

percent of the amount in the foreign bank accounts/entities in the

year with the highest aggregate account/asset value; and

A 5-percent penalty is substituted for the foregoing 20-percent

penalty where: (a) the taxpayer did not open or cause to be opened

any accounts or formed any entities, (2) there has been no activity

(deposits, withdrawals) in the account or entity during the period

the taxpayer controlled...

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