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2011 Offshore Voluntary Disclosure Initiative

March 10, 2011
Suzanne Prybella

A new initiative allows certain taxpayers to voluntarily disclose hidden offshore accounts without the risk of criminal prosecution and also provides for reduced civil penalties for prior noncompliance with offshore account reporting requirements.  The initiative, known as the 2011 Offshore Voluntary Disclosure Initiative (OVDI), was announced by the IRS on February 8, 2011.  Taxpayers participating in the 2011 OVDI must file all original and amended tax returns and include payment for taxes, interest and accuracy-related penalties by August 31, 2011. 

PENALTY FRAMEWORK

The 2011 OVDI provides the following penalty framework during the eight-year look-back period:

  • an “off-shore” penalty of 25% on the highest annual aggregate balance in the unreported accounts;
  • an “accuracy-related” penalty of 20% for unpaid taxes; and
  • late filing and/or late payment penalties in certain cases. 

A taxpayer with offshore accounts or assets that, in the aggregate, did not exceed $75,000 in any calendar year during the look-back period will qualify for a reduced 12.5% rate instead of the standard 25% rate.  A 5% rate (instead of the standard 25% rate) will apply in certain limited circumstances (e.g., in the case of foreign residents who were unaware that they were U.S. citizens). Under the 2011 OVDI, taxpayers will not be required to pay a penalty greater than what they would otherwise be liable for under the maximum penalties imposed under existing statutes. The 2011 OVDI also offers a modified mark-to-market election for taxpayers with interests in passive foreign investment companies (e.g., foreign mutual funds) to determine the income from such investments. 

Eligibility

Taxpayers, including entities such as corporations, trusts and partnerships, who have undisclosed offshore accounts or assets are eligible to apply for the 2011 OVDI.  However, taxpayers under criminal or civil investigation by the IRS or who participated in the 2009 Offshore Voluntary Disclosure Program (predecessor to the 2011 OVDI) are ineligible.

Procedure

There is a fairly simple process to make a voluntary disclosure under the 2011 OVDI.  A taxpayer may either submit basic personal information by fax letter to the IRS, or they may submit a more detailed disclosure letter from the outset. Either way, a detailed package of information must ultimately be provided to the IRS to secure acceptance into the program. We have taken several clients through this process and can assist you.  

Webpage

The IRS has launched a new webpage that includes the full terms and conditions of the 2011 OVDI, as well as the necessary forms and documents for making a disclosure.  In addition, the webpage contains information regarding the procedure for making a voluntary disclosure and a comprehensive FAQ. For more information regarding the 2011 OVDI, please visit www.irs.gov/newsroom/article/0,,id=234900,00.html.

If you would like to discuss how any of these changes may affect your business or personal income tax situation, or have any other tax or estate planning questions, please contact one of our Tax and Estates attorneys.

IRS Circular 230 Notice:  To ensure compliance with certain regulations promulgated by the U.S. Internal Revenue Service, we inform you that any federal tax advice contained in this communication (including any  attachments) is not intended or written to be used, and cannot be used, by any taxpayer for the purpose of (1) avoiding tax-related penalties under the U.S. Internal Revenue Code, or (2) promoting, marketing or recommending to another party any tax-related matters addressed herein, unless expressly stated otherwise.

This correspondence should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult a lawyer concerning your own situation and legal questions.
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