Tough, fair' program is 'last, best chance' to declare offshore accounts
Executive Summary
- Noncompliant US taxpayers have until August 31, 2011 to declare accounts, file accurate returns and pay back taxes, interest, and certain penalties for tax years 2003 through 2010. Participants must also pay a penalty of 25 percent of the highest aggregate value of 'offshore' accounts or assets during that period.
- A 12.5 percent penalty is available for those with accounts of less than $75,000 in the aggregate, and a 5 percent penalty is available for individuals who had been unaware of their US citizenship.
- Individuals who have already filed 'quietly' can take advantage of the new program to protect against the possibility of higher penalties and criminal prosecution.
- Participants should strongly consider initiating the disclosure with an attorney to benefit from the protection of the attorney-client privilege which is unavailable to accountants and other professionals.
Compliance in a 'riskier world'
Against a backdrop of 'quite advanced' investigations into banks and intermediaries in Europe, the Middle East and Asia, the IRS announced yesterday a new 'offshore' voluntary disclosure initiative ('OVDI') aimed at noncompliant US taxpayers with unreported 'offshore' bank accounts and assets.
The OVDI, a modified version of a program offered in 2009, gives taxpayers with unreported accounts a chance to come clean while mitigating the risk of criminal prosecution. The IRS has promised to actively 'ferret out' noncompliant taxpayers by relying on a growing amount of data obtained from whistleblowers, disgruntled bank employees, tax treaty information requests, and the Foreign Account Tax Compliance Act ('FATCA') provisions enacted last year.
Noncompliant taxpayers who fail to come forward and complete a voluntary disclosure before the August 31 deadline will face 'more dire' consequences including higher civil penalties and the possibility of criminal prosecution. IRS Commissioner Douglas Shulman has called the 2011 OVDI the 'last, best chance' for taxpayers to come clean 'while we have other banks in our sights.'
The 2011 Offshore Voluntary Disclosure Initiative
The new OVDI borrows heavily from the terms offered in 2009 with several significant changes. First, the time period at issue has been increased to eight years. Taxpayers will now be required to pay back taxes, interest, and accuracy or delinquency penalties for tax years 2003 through 2010.
Additionally, taxpayers must pay a penalty of 25 percent of the total asset value in all unreported foreign bank accounts and entities (calculated by reference to the year in which the value of such accounts and entities was the highest during the eight year period). This penalty, along with the penalties listed above, is 'in lieu of' all other penalties that the IRS could assert, and was increased from the 20 percent penalty in the 2009 program.
Although the 'in lieu of' penalty has increased, the IRS has expanded the group of individuals who may qualify for a reduced penalty rate. Individuals with smaller offshore accounts (i.e., where the value of the unreported accounts or assets did not surpass $75,000 in any year during the period) may qualify for an 'in lieu of' penalty of 12.5 percent.
Inherited accounts are eligible for a reduced 'in lieu of' penalty of 5 percent where the taxpayer (i) did not open the account in question, (ii) exercised only minimal control over the account, (iii) has not withdrawn more than $1,000 from the account in any year in the disclosure period and (iv) can show that all applicable US taxes have been paid on funds deposited into the account. This is somewhat more favourable than the treatment of inherited accounts under the 2009 program.
Individuals classified as 'accidental Americans' may qualify for a 5 percent 'in lieu of' penalty if such persons were unaware that they had US citizenship, for instance because they were born in the US to non-US parents and were raised outside the US.
Prior disclosures
The IRS has confirmed that more than 3,000 disclosures have been made since the last voluntary disclosure program ended, and those taxpayers who initiated a disclosure after October 15, 2009 will be eligible to take advantage of the provisions of the new 2011 OVDI.
Taxpayers who came forward during the 2009 program may be eligible to claim the reduced 'in lieu of' penalty if they otherwise satisfy the criteria. 'Accidental Americans' and people with inherited accounts who have already come forward may therefore benefit from a reduced penalty.
'Quiet' voluntary disclosures
Commissioner Shulman has stated that the IRS is aware that some
individuals have attempted so-called 'quiet' disclosures by
filing amended returns and paying additional taxes and interest.
The IRS is currently reviewing amended returns that show an
increase in income and selecting returns for audit. Individuals who
are singled out for audit are not eligible to participate in the
OVDI.
Individuals who have filed quietly and have not yet been audited
may make an application to participate in the OVDI.
Protection under the attorney-client privilege
Individuals who are considering making a voluntary disclosure should seek the assistance of an attorney. The failure to file an income tax return, filing a false income tax return, wilfully failing to file an 'Foreign Banks and Foreign Accounts' (FBAR) or filing a false FBAR can be crimes punishable by imprisonment and substantial fines. While the OVDI provides the opportunity to avoid criminal prosecution, legal counsel can help determine if an individual is eligible for the program, the risks of criminal prosecution, and the courses of action to bring the accounts into compliance. Importantly, conversations with other professionals, such as accountants, are unprotected and may be subject to disclosure. Communications with an attorney, however, may be shielded from disclosure by the attorney-client privilege. Legal counsel becomes the taxpayer's advocate with the IRS and can protect against making incriminating statements or disclosing too much information.
Deadline
Individuals who wish to take advantage of the OVDI must act quickly. The IRS must receive all amended income tax returns, amended informational filings, a full payment of the amount due as well as various other documents by August 31, 2011. A complete application is required for admission into the OVDI.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
