The IRS Reopens Voluntary Disclosure Program from Taxpayers who Own Unreported Foreign Financial Accounts and Income
By Timothy R. Weeks, Esq., LL.M.
January 11, 2012
On January 9, 2012, the IRS announced that it is reopening its offshore voluntary disclosure program “to help people hiding offshore accounts get current with their taxes.”[1] The IRS press release announcing the reopening of this program can be found here: http://www.irs.gov/newsroom/article/0,,id=252162,00.html.
The terms of the new Voluntary Disclosure Program are similar to the terms of the 2011 Offshore Voluntary Disclosure Initiative (“2011 OVDI”). Taxpayers who have undisclosed offshore accounts or assets are eligible to apply to the IRS for inclusion in this program. However, the IRS will not accept individuals into the program if it has already commenced an investigation into that individual’s foreign accounts. Inclusion in the program requires taxpayers to file or amend United States income tax returns for 2003 through 2010 and pay the corresponding taxes and interest. Finally, taxpayers must file Forms TD F 90-22.1: Reports of Foreign Bank and Financial Accounts, commonly referred to as FBARs, for tax years 2003 through 2010.
The penalty terms of the reopened disclosure program are expected be more onerous than in the 2009 Offshore Voluntary Disclosure Program (“2009 OVSP”) or the 2011 OVDI. Instead of the 20 percent and 25 percent miscellaneous offshore account penalty for the 2009 OVDP and the 2011 OVDI, respectively, the new program will require individuals to pay a “penalty of 27.5 percent of the highest aggregate balance in the foreign bank account/entities or value of foreign assets during the eight full years prior to the disclosure.” However, as in the previous programs, taxpayers may be eligible for a 12.5 percent penalty if their accounts do not exceed $75,000 or a 5 percent penalty for certain accounts unopened and generally untouched by the taxpayer. Additional failure-to-file, failure-to-pay, and accuracy-related penalties may also apply.
These disclosure programs have been a success for the IRS. To date, the IRS has handled 33,000 voluntary disclosures from the 2009 and 2011 programs and has collected $4.4 billion from those taxpayers. Since many of the 2011 OVDI cases have not been concluded yet, that amount is expected to grow.
Importantly, according to the IRS, those “who have come in since the 2011 program closed last year will be able to be treated under the provisions of the new OVDP program.” Additionally, there is no set deadline for people to apply to the program, although the IRS recommends disclosures sooner rather than later since it cannot guarantee that the terms of the new OVDP will not change over time. “For example, the IRS may increase penalties in the program for all or some taxpayers or defined classes of taxpayers – or decide to end the program entirely at any point.”
Taxpayers who have been accepted into the new program may opt out of the civil settlement structure of the new disclosure program if, after careful analysis, they believe the typical statutory penalties are more beneficial to their specific case.
More details on this new voluntary disclosure program will be available on the IRS website, IRS.gov, within the next month.
Attorney Advertising. This Tax Alert is a periodical publication of M. Robinson & Company, P.C. and should not be construed as legal advice or a legal opinion on any specific facts or circumstances. The contents are intended for general information purposes only, and you are urged to consult an attorney concerning your own situation and any specific legal questions you may have. Any tax information contained in this communication is not intended or written to be used, and cannot be used by any taxpayer, for the purpose of avoiding any federal tax penalties.
[1] Press Release, IR-2012-5, “IRS Offshore Programs Produce $4.4 Billion To Date for Nation’s Taxpayers; Offshore Voluntary Disclosure Program Reopens,” Jan. 9, 2012.
The IRS published Summertime Tax Tip 2011-13: “Does the IRS Have Money Waiting for You?” The IRS gives instructions to taxpayers who could have claimed the Earned Income Tax Credit but didn’t, or who didn’t receive their tax refund checks in the mail
“The IRS sent an email notice this year during the tax filing season that every year, tens of thousands of individuals are eligible for the Earned Income Tax Credit but fail to claim it on their tax return. Let’s leave to the side the question of whether the Earned Income Tax Credit is good policy. Given that it exists to help poor people, it is a significant positive achievement if we in the professional community can make people aware of the legitimate tax benefits to which they are entitled. Whether we give poor people our own money by charity, or enable them to take legitimate benefits to which they are entitled, the result is the same: more money for them to meet their living expenses. Similarly, the IRS sends out messages every year that many thousands of individuals fail to deposit their tax refund checks. The IRS promotes direct deposit of tax refunds into bank accounts to minimize the extent of this problem. Whether one is claiming a tax refund or depositing an existing refund check, the deadline for the 2008 tax year is April 15, 2012, three years after the original filing deadline.” – said Paralegal, Yechiel Robinson (M. Robinson and Co., P.C. 2011).
The question of missing money is almost always outside the scope of what M. Robinson & Company, P.C. does for its clients. The closest analogy in our practice area is the filing of an amended tax return (Form 1040X) as a “protective claim for refund” to protect the client’s ability to take a refund if the client’s tax position is sustained. For example, there may be a question of whether a taxpayer is allowed to record a business loss as tax-deductible, and if so, which year to assign that loss. This is a special case of refund money that a client might be entitled to take, but it is impossible to know unless we formally request that refund on a Form 1040X for the federal income tax, or Form CA-6 from the Massachusetts Department of Revenue.
As always, the foregoing should be regarded as general conceptual information, and anyone who wants to explore the possibility of deducting a business loss from their income should consult a tax professional.
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The Massachusetts Department of Revenue announced specific laws and guidelines for implementing the annual sales tax holiday in Massachusetts on Saturday, August 13 and Sunday, August 14, 2011. Retailers will not collect the 6.25% sales tax on most items. The tax will still be collected for motor vehicles, certain other items, and any single item sold for $2,500 or more.
One of the guidelines says that any sales tax erroneously or improperly collected must be remitted to the Department of Revenue. (This makes sense to me because a retailer should not have an incentive to profit dishonestly, even if unintentionally.)
For the Technical Information Release, TIR 11-7, click here. For all Technical Information Releases that the Massachusetts Department of Revenue has published in since 1974, click here then follow the links on the bottom of that screen.
The IRS announced yesterday that the Two-Year Limit No Longer Applies to Many Innocent Spouse Requests. For technical details, see Notice 2011-70. Innocent Spouse Relief is available to one member of a married couple that filed a joint tax return, if that member did not know and had no reason to know of his/her partner’s tax liability. For details, see IRS Publication 971.
Our attorneys can take innocent spouse cases to the IRS Appeals process.
The National Taxpayer Advocate has published a mid-year report. Here’s the Introduction section of the report.
Attorney Timothy Weeks and Yechiel Robinson, Paralegal 2011,
ran yesterday in the Lawyers Have Heart race.
The deadline to file the Foreign Bank Account Report (TD F 90-22.1, commonly known as the “FBAR”) for the 2010 calendar year is today: June 30, 2011.
Our office filed FBARs on behalf of six clients in June 2011 for the 2010 reporting year.
Debbie Robinson, Director of Business Development, called attention to a commentary by Kahn Litwin Renza (“KLR”), a large CPA firm with offices in Waltham, MA and Providence, RI. KLR has partnered with M. Robinson & Company, P.C. on marketing events. KLR notified readers of its website and email list that the IRS has extended the deadline for certain filers with signature authority by four months until November 1, 2011. This extension, announced in IRS Press Release IR-2011-54, applies to FBARs for financial services professionals for 2009 and earlier calendar years that were properly deferred in accordance with previously published rules. For details, please read: http://kahnlitwin.com/ARTICLES/IRS%20extends%20FBAR%20deadline%206-28-11%20(2).pdf
The IRS issued a press release reminding people to file the Foreign Bank Account Report (FBAR) by June 30.
The press release summarizes the major issues. I have two comments:
1. The civil penalties for failure to file the FBAR, as presented in the press release, are the worst-case scenario for “willful” failure to file. There is a lesser penalty regime for “non-willful” failure to file. Even these lesser penalties are significant and a wise taxpayer should do whatever necessary to avoid them.
2. The IRS did well to provide the address for delivery services such as FedEx to deliver the FBAR:
U.S. Department of the Treasury
Currency Transaction Reporting
985 Michigan Avenue
Detroit, Mich., 48226.
FedEx requires the sender to provide the recipient’s phone number. The IRS should have included this number in the press release, and they do show it on their website. If sending an FBAR by FedEx, as we did for a client last week, list the recipient’s phone number as 313-234-1062. For questions about how to fill out the FBAR, call 1-800-800-2877 and choose option 2.
REFERENCES
Press release IR-2011-70 (email version posted on someone’s blog)
IRS website on the Report of Foreign Bank and Financial Accounts (FBAR)
The IRS announced (press release MA-2011-30) that victims of the tornadoes that occurred in Western Massachusetts on June 1, 2011 are entitled to extensions for filing tax returns and depositing tax payments. For details, see the press release. Everyone who lived or worked in Hampden County or Worcester County when the disaster occurred is eligible for the tax relief, regardless of whether that individual was directly harmed by the incident. There are two extensions:
(1) “The IRS is waiving the failure-to-deposit penalties for employment and excise tax deposits due on or after June 1 and on or before June 16, as long as the deposits were made by June 16.” [Curiously, the date of the press release is June 16. The IRS did not give any extension for the period of time after it made the announcement of relief. I would assume that the IRS expects anyone affected to be able to make those payments within two weeks after the disaster occurred.] Anyone who is facing a penalty for failure-to-deposit, and wishes for relief because of the special disaster rules, should contact the IRS disaster hotline at 1-866-562-5227.
(2) Aside from the foregoing instance, the IRS extends the deadline for all forms and payments that are due after June 1 but before August 8 so that the new deadline is August 8, 2011. Therefore, the second-quarter estimated tax payment which is normally due on June 15 will be due this year on August 8. A corporation with a March 31 fiscal year end (unusual) would also normally need to file its tax return by June 15, and can now file it on or before August 8, 2011.
Also, the IRS allows tax filers to deduct casualty losses for either last year’s tax return (so that you can get your refund this year) or this year’s tax return. You should consult a tax or financial advisor to decide how to elect to take the casualty loss deduction, whether to choose the 2010 tax return or the 2011 tax return.
If you have suffered a significant loss in this disaster or any disaster, consult the IRS web page “Tax Relief in Disaster Situations.” If you need professional assistance, please consider calling our office.
UPDATE (June 23, 2011): The Massachusetts Department of Revenue also announced tax filing relief for anyone who is eligible for relief from the IRS because of the June 1 storms. See TIR 11-4: Extension of Time for Certain Tax Filings.
The IRS removed tax-exempt status from approximately 275,000 organizations which did not file information returns with the IRS for the last three years. An article in The New York Times suggested that many of these organizations no longer exist, and the removal of their exempt status should cause them no harm. The IRS agrees. Organizations that do exist but are managed by individuals unfamiliar with the requirement to file the Form 990, 990-EZ or 990-N may be learning of their new problems later this year.
The IRS published instructions for organizations which need to apply to have their exempt status reinstated retroactively.
Large nonprofits are required to file Form 990 every year by May 15 (the deadline can be extended), or Form 990-EZ if that is sufficient. Smaller nonprofits must file Form 990-N, the “e-postcard”, which simply states the name and address of the nonprofit but does not require any financial data. In Massachusetts, public charities are required to file Form PC with the Attorney General’s office (Nonprofits/Public Charities division), and they must also file an Annual Report with the Massachusetts Secretary of State.
In Massachusetts, a nonprofit which wishes to dissolve must apply to the state Attorney General’s office (Nonprofits/Public Charities division), and if the Attorney General approves, the nonprofit may petition the Massachusetts Supreme Judicial Court for dissolution, and the remaining assets of the nonprofit can be transferred to another charity with a similar mission as the dissolving charity.
SOURCES
IR-2011-63: http://www.irs.gov/newsroom/article/0,,id=240239,00.html
“I.R.S. Ends Exemptions for 275,000 Nonprofits” by Stephanie Strom, The New York Times, June 8, 2011. http://www.nytimes.com/2011/06/09/business/09charity.html?_r=1&scp=1&sq=IRS%20exempt&st=cse
“The Voluntary Dissolution of a Massachusetts Public Charity” by R. A. Rockefeller and T. L. Sturges. http://nixonpeabody.com/linked_media/publications/dissolution_public_charity_BBA_Rockefeller.pdf
The IRS Reopens Voluntary Disclosure Program from Taxpayers who Own Unreported Foreign Financial Accounts and Income
