The IRS announced on February 8, 2011 that it would offer a special amnesty program for holders of foreign financial accounts until August 31, 2011 (Note 1). This second Offshore Voluntary Disclosure Initiative (OVDI) follows the successful first OVDI which closed on October 15, 2009. The new program is intended to be stricter than the old program in order not to reward taxpayers for waiting to come into compliance. Therefore, the special penalty (see below) is 25% in the current program, increased from 20% in 2009. However, there are some exceptional situations where the 2011 program is more taxpayer-friendly than 2009. The IRS invites affected taxpayers who came forward in 2009 to appeal for relief under the 2011 rules (Note 2).
IRS Commissioner Douglas Shulman released a prepared statement on February 8. Shulman said: “Our primary goal is to have long-term voluntary compliance with our nation’s tax laws. We owe that to the honest Americans who pay taxes every year. After our last program closed in October 2009, we have continued to see interest from people looking for a way to get back into the tax system.” (Note 3).
Taxpayers in the program must file correct amended tax returns and Foreign Bank Account Reports (TD F 90-22.1, commonly known as an “FBAR”) for all years from 2003 through 2010. Interest income from bank accounts must be reported on Schedule B, which also asks the preparer to disclose the existence of foreign bank accounts. FBARs must be prepared if the total of all foreign bank accounts exceeds $10,000 at any time during the year.
The FBAR is not legally part of the tax system. It is a reporting requirement within the Financial Crimes Enforcment Network (FinCEN), a division of the U.S. Treasury separate from the Internal Revenue Service. The FBAR filing requirement in 31 U.S.C. 5321 (“Title 31”) is outside of the Internal Revenue Code (“Title 26”). For practical reasons, since 2003, the IRS enforces the FBAR filing requirement on behalf of FinCEN. For an explanation of why this shared authority is necessary, see Treasury Inspector General for Tax Administration report: TIGTA 2010-30-125 (Note 4).
Taxpayers must pay back taxes, normal penalties (such as failure-to-file if no tax return was filed) and interest for all years from 2003 through 2010. This is similar to the 2009 OVDI, which required the same filings and payments for 2003 through 2008. The taxpayer must waive their rights under the statute of limitations, which normally does not allow the IRS to go back eight years. However, if the taxpayer failed to file certain forms, the statute of limitations will not have begun to run; and there is no statute of limitations for fraud. (Note 5.)
In addition, the taxpayer must pay a special penalty of 25% of the highest aggregate balance in the foreign accounts during the eight-year period from 2003 through 2010. To visualize this, draw a graph of the asset value in all of the combined foreign accounts starting at the beginning of 2003 and ending at the end of 2010. The maximum point on that graph is the highest aggregate balance. The penalty is 25% of that amount. Although the back taxes and standard penalties relate specifically to income, this special 25% penalty relates to the existence of the principal funds in the foreign account. The special penalty substitutes for statutory FBAR penalties under Title 31. In some cases, the worst-case penalty under Title 31 is less than 25% of the highest account balance. If so, the taxpayer may elect to pay the lesser amount. Also, in some cases the taxpayer is eligible for a reduced penalty of 5% or 12.5% (Note 2).
Attorney Morris N. Robinson, the Managing Director of M. Robinson & Company in Boston, anticipated the new program based on public statements from IRS executives. Robinson wrote an article for the Boston Business Journal on February 4, 2011, just four days before the IRS announced the new OVDI (Note 6). Robinson suggests that the IRS lacks the tools to enforce the foreign financial reporting laws effectively. The IRS should hope to attract 25,000 or more voluntary disclosures. The new Foreign Account Tax Compliance Act (FATCA), which becomes active in 2012, imposes additional reporting requirements for foreign banks with U.S. account holders. Shulman hinted at FATCA when he said: “starting in a couple of years, new laws will come into affect [sic] that will give us more information than ever on offshore holdings.”
Taxpayers who wish to make a voluntary disclosure should follow the procedure outlined on the IRS website (Note 7). Taxpayers should request clearance to make a voluntary disclosure because they are eligible only if the IRS has not already learned about their offshore accounts.
Shulman warned taxpayers to take action immediately. He said: “I offer a word of advice to procrastinators. The deadline for this program is Aug. 31. But the deadline means a different thing for the 2011 initiative than it did for the 2009 initiative. You will need to provide all of your paperwork by Aug. 31. You can’t have a sudden revelation on the morning of Aug. 31 and jump into this program in the final hours. The Aug. 31 deadline means you need to have filed everything by then. You need your tax returns, your paperwork – and you need to write a check at that time to the U.S. Treasury. So people should start now – not in August.”
A voluntary disclosure client needs to prepare amended tax returns and FBARs for eight years. Simply to find out the highest account balance for each year’s FBAR and to calculate the 25% penalty may be complicated if the foreign financial institution is slow to respond. There are special tax rules to account for foreign investments and foreign currency exchanges. Unless the original tax return is completely correct to begin with but for the omission of one foreign account, the taxpayer’s representative will need to take time to review the problems and make corrections for the amended tax return. In our client’s case, we have decided to file amended tax returns for every year, and the fact-finding to support the amended tax returns has taken a considerable amount of time.
Therefore, we encourage U.S. persons with undisclosed offshore bank accounts to discuss their concerns with us. We need enough time to fix the problems and file new or amended tax returns and FBARs before the August 31 deadline. The amount of time we would need can vary significantly depending on the complexity of the situation. Please visit our website: http://www.masstaxlawyers.com and feel free to call us if you are thinking about a Voluntary Disclosure.
1. “I.R.S. Offers a Tougher Amnesty Deal for Offshore Accounts” by Lynnley Browning. The New York Times, February 8, 2011. http://www.masstaxlawyers.com/tax-alert—irs-poised-to-announce-new-fbar-amnesty/
IRS main page about the new Voluntary Disclosure Program. http://www.irs.gov/newsroom/article/0,,id=234900,00.html
2. “2011 Offshore Voluntary Disclosure Initiative Frequently Asked Questions and Answers.” (Hereafter: “FAQ”.) Questions 52 and 53. http://www.irs.gov/businesses/international/article/0,,id=235699,00.html
3. “IRS Commissioner Douglas Shulman’s Statement on the 2011 Offshore Voluntary Disclosure Initiative”. February 8, 2011. http://www.irs.gov/newsroom/article/0,,id=235728,00.html
4. TIGTA 2010-30-125. September 29, 2010. http://www.treasury.gov/tigta/auditreports/2010reports/201030125fr.html
5. FAQ, Question 42. http://www.irs.gov/businesses/international/article/0,,id=235699,00.html
6. “IRS Poised to Announce New FBAR Amnesty” by Morris N. Robinson. Boston Business Journal, February 4, 2011, page 44. http://www.masstaxlawyers.com/tax-alert—irs-poised-to-announce-new-fbar-amnesty/
7. “How to make a Voluntary Disclosure under the 2011 OVDI.” http://www.irs.gov/compliance/enforcement/article/0,,id=205909,00.html
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