Press Room: Tax Release
New Opportunity for Taxpayers with Undisclosed Offshore Accounts and Assets to Reduce Penalties
On February 8, 2011, the IRS announced an opportunity for taxpayers to avoid a substantial portion of the penalties that would otherwise be due on previously unreported offshore accounts, entities and income. The scope of the required disclosure of such accounts, entities and income has caught many taxpayers and tax return preparers unaware and nondisclosure carries with it substantial penalties. Taxpayers who successfully participate in the program will benefit from significantly reduced civil penalties and reduced risk of criminal prosecution. Time is of the essence, however, since these benefits are available only to those who complete all requirements before September 1, 2011. For those who might benefit from this program, now is the time to act, as it will likely take several months to obtain all required foreign records and to complete (or amend) all relevant tax returns. Assets that may require disclosure include assets inherited from relatives in foreign countries, interests in foreign hedge funds or businesses, and interests in foreign trusts. Assets requiring disclosure do not include investments through mutual funds that invest in foreign companies that are already reported to IRS.
Key Considerations of New Program
Under the new Program, titled the 2011 Offshore Voluntary Disclosure Initiative (2011 OVDI), participating taxpayers must file new or amended tax and information returns for all years covered by voluntary disclosure, 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. 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 very limited number of cases.
The program describes an example to illustrate the benefit of the program based on an unreported foreign bank account with a balance of $1,000,000. In this example, the taxpayer would owe taxes and penalties under the 2011 OVDI of $518,000 plus interest. Absent the successful participation in the program, the taxpayer could face $4,543,000 of tax and risk of criminal prosecution and other civil penalties.
In addition to a general announcement of the program, IRS released 53 Q&As that address many specific issues, however, certain key issues/points should be kept in mind:
1. Any taxpayer that has an undisclosed offshore account or asset and failed to report income is eligible to participate. Taxpayers who properly reported all income in a given year but who failed to file appropriate tax or information returns (e.g., FBARs, 5471s, 3520s, etc.) relating to offshore assets or accounts are not eligible to participate but should file delinquent returns with the appropriate service center. (Q&A17 & 18). IRS will not assess failure to file penalties if there are no underreported tax liabilities and the information returns are filed by August 31, 2011. (Q&A 18).
2. Taxpayers who already filed amended returns reporting the additional unreported income (i.e., made a “quiet disclosure”), without making a voluntary disclosure, may participate in the 2011 OVDI and possibly obtain the reduction in penalty exposure available under the program.
3. Entities are eligible to participate in the 2011 OVDI. (Q&A13).
4. Special complex rules are provided to address the treatment of PFIC investments and significant relief may be available to taxpayers who own PFICs during the 2003 -2010 time period.
5. Q&A 47 makes clear that a practitioner whose client declines to make full disclosure of the existence of, or any taxable income from, a foreign financial account, may not prepare a current or future income tax return for that taxpayer without being in violation of the rules of practice before the Internal Revenue Service (Circular 230). Thus, if a client declines to complete a tax or information return otherwise required by law, the client’s tax advisor is in violation of those rules of practice (and subject to penalties and sanction) if he/she prepares any tax return for that client.