On February 8, 2011 IRS Commissioner Doug Shulman announced the details of a new voluntary disclosure program that’s designed to get people with foreign accounts back into the U.S. tax system.
The IRS implemented a similar voluntary disclosure program in 2009 which resulted in more than 15,000 disclosures from around the world. Since the program ended, the IRS has had more than 3,000 taxpayers come in through the ‘regular’ voluntary disclosure program as well.
The new program is called the 2011 Offshore Voluntary Disclosure Initiative, or “OVDI” for short. The stated goal of the OVDI is to have long-term voluntary compliance with the nation’s tax laws.
The key terms of the OVDI are:
- Participants must pay back-taxes and interest for up to eight years on their unreported foreign income, plus accuracy-related and/or delinquency penalties (compared to six years under the previous 2009 program); and
- One of the following additional penalties will also be imposed:
- A penalty equal to 25% of the highest aggregate account balance between 2003 and 2010 of the undisclosed foreign bank accounts (compared to a 20% penalty under the 2009 program);
- A penalty equal to 5% of the highest aggregate account balance between 2003 and 2010 of the undisclosed foreign bank accounts penalty (similar to the 2009 program but available typically only in rare circumstances); or
- A penalty equal to 12.5% of the highest aggregate account balance between 2003 and 2010 of the undisclosed foreign bank accounts if the undisclosed accounts or assets were under $75,000 (a more generous provision which was not available under the 2009 program).
- If the disclosure is accepted by the IRS, the taxpayer will not be criminally prosecuted.
The OVDI will end on August 31st. A taxpayer must file the voluntary disclosure paperwork, required tax returns, and make or arrange for payment of the liability by August 31st.
The IRS has been getting much better at detecting offshore accounts. It has access to greater information, is using more sophisticated investigative methods, and has hired an extensive number of new auditors and agents in the foreign area. The risk of the IRS discovering undisclosed offshore accounts has now significantly increased. The IRS is investigating a number of banks based on information received from the 2009 program disclosures and from other sources.
Taxpayers who fail to come forward and disclose their foreign accounts face harsh penalties and the very real possibility of prison. The IRS, together the United States Department of Justice, has stepped up efforts to prosecute those found hiding their foreign earnings and assets.
A taxpayer who makes a voluntary disclosure under the OVDI will pay a price but avoid going to jail and paying even greater penalties.
The penalties imposed under each voluntary disclosure program offered by the IRS continue to escalate. A taxpayer should not expect the IRS to announce subsequent voluntary disclosure programs with better terms. Taxpayers with undisclosed offshore accounts should consult with their tax advisors and consider the pros and cons of participating in the OVDI.