The Internal Revenue Service (IRS) announced on January 9, 2012 that it has reopened its voluntary disclosure initiative for the third time, in response to the US government's continuously widening investigation of foreign banks relating to unreported offshore accounts of US persons. This third special disclosure initiative follows the IRS's 2009 and 2011 Offshore Voluntary Disclosure Programs (OVDPs) and is available to those taxpayers who did not file in time for the 2009 or 2011 OVDPs. As in the past the OVDPs are designed to bring offshore money back into the US tax system and help individuals with undisclosed income from hidden offshore financial accounts get current with their taxes. This program allows individuals with previously unreported foreign financial accounts to significantly reduce their exposure to substantial civil tax penalties and, in many cases, to eliminate the possibility of criminal prosecution. Foreign accounts include assets held in offshore trusts, foundations, corporations and other entities.

The known countries involved in the US government's investigation include Switzerland, Liechtenstein, India, Singapore, Hong Kong and Israel. The known banks include UBS, Credit Suisse (Clariden Leu), HSBC, Basler Kantonalbank, Wegelin & Co., Zuercher Kantonalbank, Julius Baer, Bank Leumi, Bank Hapoalim, Mizrahi-Tefahot Bank, Liechtensteinische Landesbank AG, and NZB AG. Due to this widening investigation, more and more financial institutions are agreeing to turn over information concerning their clients to the US authorities, whether voluntarily or by Court order or treaty. Earlier this month Wegelin & Co. announced that certain of its bankers were indicted in federal court for assisting US persons with their offshore accounts. Recently, Credit Suisse advised certain of its clients that it will disclose their information to the IRS. It is also expected that HSBC will begin to provide information about its US clients to the IRS. Such information often includes account information dating back to 2002. Another risk to taxpayers who do not report their offshore accounts is the Foreign Account Tax Compliance Act (FATCA) recently passed by Congress, which goes into effect in 2013. Under FATCA, foreign financial institutions will be required to enter into special compliance agreements with the IRS to identify US accounts, report certain information to the IRS regarding US accounts, and withhold a 30-percent tax on certain payments made to non-compliant institutions and account holders. This will result in increased reporting to the IRS of US account holders.

Holders of undisclosed accounts should not assume that because their bank or financial institution has not been publicly identified as a target, they are not at risk. Taxpayers who fail to report could face far higher penalty scenarios as well as the possibility of criminal prosecution. For certain taxpayers, absent this program the potential non-reporting penalties may substantially exceed the value of the offshore accounts.

The new initiative is similar to the 2011 program with a few key differences. First, unlike the earlier programs, there is no set deadline for people to apply. However, the IRS has stated that it may change the terms of the program at any time. For example, the IRS may increase the penalties in the program or may end the program entirely. The second key difference is that individuals will have to pay a penalty of 27.5 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. This is increased from 20 percent in the 2009 program and 25 percent in the 2011 program. Some taxpayers will be eligible for 5 or 12.5 percent penalties, similar to the 2011 program. Participants also must pay back-taxes and interest for up to eight years, as well as paying accuracy-related and/or delinquency penalties.

In order to qualify for the voluntary disclosure program, a taxpayer must make a disclosure that is truthful, timely and complete. The taxpayer must further show a willingness to cooperate (and does in fact cooperate) with the IRS in determining his or her correct tax liability, and makes good faith arrangements with the IRS to pay in full, the tax, interest, and any penalties determined by the IRS to be applicable. A disclosure is timely if it is received before (a) the IRS has initiated a civil examination or criminal investigation of the taxpayer, or has notified the taxpayer that it intends to commence such an examination or investigation, (b) the IRS has received information from a third party (e.g., informant, other governmental agency, or the media) alerting the IRS to the specific taxpayer's noncompliance, (c) the IRS has initiated a civil examination or criminal investigation which is directly related to the specific liability of the taxpayer, or (d) the IRS has acquired information directly related to the specific liability of the taxpayer from a criminal enforcement action (e.g., search warrant, grand jury subpoena).

US persons with previously unreported offshore accounts should consult with their legal counsel to discuss the benefits and costs of making a voluntary disclosure and to determine if making a voluntary disclosure is right for them.

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