On February 8, 2011, the IRS announced its second special disclosure initiative related to offshore bank accounts. This new initiative, like the first program in 2009, is designed, according to the IRS, “to bring offshore money back into the U.S. tax system and help people with undisclosed income from hidden offshore accounts get current with their taxes.” The new initiative, known as the 2011 Offshore Voluntary Disclosure Initiative (OVDI), is available until August 31, 2011.
By way of background, taxpayers are required to report their interest in or signature authority over a foreign bank account on Schedule B of the U.S. individual income tax return which asks the direct question: “At any time during [relevant year], did you have an interest in or a signature or other authority over a financial account in a foreign country, such as a bank account, securities account, or other financial account?” If the “yes” box is checked, the taxpayer is directed to file Form TDF 90-22.1, otherwise known as the “FBAR” (Report of Foreign Bank and Financial Accounts), if the aggregate value of the accounts exceeds $10,000 at any time during the year. The FBAR is due by June 30 of each year.
Under the IRS’s first disclosure initiative, which was announced in March 2009 and ran through October 15, 2009, taxpayers were required to amend all returns from 2003 to 2008 (six years) to include the earnings on the previously unreported account, pay the additional tax on the amended returns together with a penalty on the tax (generally 20%) and interest and pay a penalty equal to 20% of the amount in the foreign bank account or entity in the year with the highest aggregate account or asset value from 2003 to present. This offer was in lieu of the potential penalty for a “willful” failure to file an FBAR which can be as high as the greater of 50% of the total balance of the foreign account or $100,000 for each year the account was not reported to the IRS. This first program attracted about 15,000 disclosures covering involving banks in more than 60 countries.
According to the IRS, its decision to open a second special disclosure initiative follows continuing interest from taxpayers with foreign accounts. Since the first initiative closed in October 2009, more than 3,000 taxpayers have come forward to the IRS with bank accounts from around the world. It had been unclear how the IRS would treat these taxpayers. In addition, the IRS is attempting to persuade other taxpayers to come forward to avoid higher penalties or prosecution.
The 2011 initiative generally 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. The IRS created a new penalty category of 12.5 percent for people whose offshore accounts or assets did not surpass $75,000 in any calendar year covered by the 2011 initiative. In limited situations, taxpayers may qualify for a 5% penalty. Participants in the 2011 initiative 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 31st deadline.
In announcing this new initiative, the IRS stated that: “combating international tax evasion is a top priority for the IRS. We have additional cases and banks under review. The situation will just get worse in the months ahead for those hiding assets and income offshore. This new disclosure initiative is the last, best chance for people to get back into the system.”
If you are interested in learning further about or participating in the new disclosure initiative, please contact Jean Ryan, Jay Weill or Steve Katz at (415) 392-1960.
This publication is for informational purposes only and is not intended to provide legal or tax advice, or to create an attorney-client relationship.
Pursuant to IRS Circular 230, unless expressly stated to the contrary, any tax advice is not intended and cannot be used to (i) avoid penalties under the Internal Revenue Code or (ii) promote, market or recommend any transaction or matter to another party.