On February 8, 2011, the Internal Revenue Service (IRS) announced a penalty framework allowing taxpayers to voluntarily disclose previously unreported offshore accounts and entities. The program generally provided 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. The program was only applicable to those who completed all requirements on or before August 31, 2011. For those who participated in this program, it generally took several months to obtain all required foreign records, prepare and file foreign bank account report forms TD F 90-22.1, and have amended income tax returns completed for all tax years covered by the program. Participation in the Program avoided the potential for higher monetary penalties, the risk of criminal charges, and the likelihood that one or more foreign banks would in due course have turned customer data over to the IRS in a future year. Behavior relative to tax obligations is always viewed in hindsight.
The 2011 Offshore Voluntary Disclosure Initiative (2011 OVDI), required participating taxpayers to file or submit amended income tax and, in most cases, original foreign bank account information returns for each year in the program in which the account existed. The Form TD F 90-22.1 is the Report of Foreign Bank and Financial Accounts (FBAR). Qualifying taxpayers, after satisfying program informational requirements, were required to pay (i) all taxes and interest due from 2003 to 2010, (ii) either the accuracy or delinquency penalty for each year on the amount of additional tax due, and (iii) a penalty equal to 25 percent of the highest aggregate account balance in the subject foreign account or accounts during the period from 2003 to 2010. The 25 percent penalty was subject to reduction to 12.5 percent for taxpayers whose offshore accounts or assets did not exceed $75,000 in any calendar year covered by the program, or to as low as 5 percent in a certain very limited class of cases.
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. It is expected to become more readily available as the result of recent legislation involving reporting by financial institutions. Moreover, the types of assets held abroad for which reporting is required are expanding. Financial incentives have also been increased for whistleblowers to come forward with information on foreign accounts of others. It is virtually certain that more IRS initiatives will follow upon past programs.
These programs have a preclearance procedure for getting ahead of the threat that an audit could be initiated while a taxpayer is waiting for records. Delay in entering a program with the required full-disclosure submission letter, amended income tax returns, and FBARS, increases the risk of a more onerous tax exposure. Much more strict civil penalties than those imposed in the program, and potential criminal penalties, will be pursued for those taxpayers who do not voluntarily come forward in a timely fashion. Taxpayers whose foreign account information has already been turned over to the IRS, through summons enforcement/treaty negotiations with respect to disclosure of accounts, or whose returns are already under audit or investigation, will be denied clearance and entry into such programs generally.
Commissioner Douglas H. Shulman, when announcing the 2011 program, specifically stated that taxpayers should expect new criminal investigations and prosecutions in the future. The 2011 program was intended to draw in taxpayers with unreported accounts not only in Europe but elsewhere, including throughout the Middle East and Asia, with particular emphasis, it appears, on Hong Kong and Singapore. The 2011 OVDI process was complex and appropriate or available in certain circumstances. Participation required taxpayers to quickly gather all foreign account records and copies of income tax returns filed for relevant years.
Retaining an attorney specializing in tax controversy, especially one with experience in the 2009 and 2011 IRS voluntary disclosure programs, appears to be a most prudent approach to managing the quagmire of compliance and threats of punishment involved after foreign accounts have not been disclosed for years. Effectiveness will means everything. Closure of an OVDI case expeditiously is of great importance. Given that there are time deadlines in any program, and that voluntary disclosure rules can change as a matter of policy at any time, time is of the essence for taxpayers with undisclosed accounts to move to a decision.
For additional details and information regarding Offshore Voluntary Disclosure Initiatives, please view this link. Additionally, you can find the historical submission requirements here. You can also contact Boston tax defense lawyer Theodore L. Craft to discuss your options where issues are raised by your situation.
