SECOND IRS OFFSHORE VOLUNTARY DISCLOSURE INITIATIVE

SECOND CHANCE FOR OFFSHORE TAX SCOFFLAWS

By Robert S. Steinberg, Attorney, CPA, CVA  

February 11, 2011

LAST BEST CHANCE

On February 8, 2011, the IRS announced in IR 2011-14 a second special voluntary disclosure initiative called the 2011 Offshore Volutary Discloure Initiative (2011 OVDI).  Why is this a good time for those still out in the cold to come back into the tax reporting system?  Some reasons to ponder are:

  • About 15,000 tax scofflaws entered the initial voluntary disclosure window which closed on October 15, 2009. From those cases, IRS has obtained and continues to amass substantial information about other banks and other US persons with unreported offshore financial accounts.
  • Additional cases involving banks other than UBS are now under review by IRS and will be forthcoming.
  • The HIRE Act imposes new Foreign Financial Asset Reporting on Form 1040 in 2011 and substantially increases the already draconian civil penalties that apply to unfiled FBAR reports.  Criminal problems for those who ignore the new reporting requirement are also exacerbated.
  • The HIRE Act extends the civil statute of limitations for reporting violations to six years
  • The IRS has successfully obtained convictions and guilty pleas in a number of criminal cases regarding UBS account holders.  Undoubtedly, more criminal cases will be brought.
  • New treaties and information sharing agreements with tax haven governments have been signed and others are in the works. There are now fewer hiding places that cannot be pierced.
  • Entering the program allows one to calculate with reasonable certainty to total dollar cost of settling one’s tax and reporting obligations.
  • Being accepted into the program allows one to avoid possible severe criminal fines, jail time and restitution payments for plea agreements as well as the negative effect on one’s reputation and civil rights from being adjudicated a felon.

IRS Commissioner Shulman has stated that this new voluntary disclosure program is the “last best chance for people to get back into the tax system.”  The path is not easy and the toll charge is substantial but many will likely agree that the new program beats rolling the dice on getting caught with one’s pants down.  That eventuality is becoming more likely and the government’s punishment paddle is larger and more painful to bear.  The new program will be available through August 31, 2011.

NEW FEATURES IN THE NEW 2011 OVDI

The 2011 OVDI differs from the initial program in a number of respects (See other articles on my website for a complete discussion of the original program).  These are:

  1. The 20% penalty on the highest aggregate account balance is increased to 25% of the highest aggregate (value of all accounts combined) account balance.
    1. Not only financial assets, but real estate or other assets related to tax noncompliance are to be included in the aggregate value subject to penalty regardless of the form of ownership.  This requirement could become a quagmire regarding what other assets are related to tax noncompliance from failing to report income or where unreported income accumulated funds were used to purchase other assets that do not produce income (e.g., artworks).  This process will require tracing of funds.
    2. Financial account transfers are not to be double counted provided the taxpayer can prove the transfer.
    3. Accounts unrelated to the noncompliance, not belonging to a related person or certain entities (e.g. foreign trust where  beneficiary or controlled foreign corporation), over which the taxpayer had a mere signature authority will not be counted in the penalty calculation.
    4. In no case will the total penalty imposed under the 2011 OVDI be more than the penalty the participant would have paid assuming imposition of the maximum penalty under existing law without regard to the reasonable cause exception which is not available.  Taxpayers who have reasonable cause for non-filing or reporting should not participate in the program because they are not tax criminals. The examiner will make the comparison during his or her review.
  2. In very limited situations a taxpayer can be eligible to pay only a 5% penalty:
    1. Meet all of the following:

                                                              i.      Inherited account

                                                             ii.      Minimal infrequent contact

                                                           iii.      Not withdrawn more than $1,000 except to close and transfer to US.

                                                          iv.      Did not open account with untaxed funds (must establish that funds were taxed going back as far as 1991).

  1. Foreign residents unaware of US citizenship (e.g., children born in U.S.)
  2. Taxpayers who participated in the 2009 OVDI who paid the 20% penalty but feel they are eligible for 5% rate may now apply for the lower penalty rate.

 

  1. Participants whose offshore accounts or assets did not exceed $75,000 in any year from 2003-2010 will pay a penalty of 12.5% of the highest value.
  2. The look back period for the highest balance is increased from six years (2003-2008) to eight years (2003- 2010).
  3. The number of amended returns required is also increased from six to eight years (2003-2010) increasing the cost of compliance.
  4.  The original or amended returns must be filed by August 31, 2011.
  5. Payment of tax, penalty and interest must also be made by August 31, 2011 (or good faith arrangements to pay).
  6. FBARs and original or amended offshore related information returns must be filed for the periods 2003-2010.
  7. Agreements to extend the statute of limitations on assessment of tax must be signed and provided to IRS.
  8.  The participant must pay the 20% accuracy related penalty, failure to file penalty, if applicable (can be 25% of unpaid tax), and failure to pay penalty.
  9.  Recognizing problems encountered in the first program with IRS applying Foreign Passive Investment Company (FPIC) tax rules to the disclosed offshore accounts, an election is available for an alternative resolution of PFIC issues which may offer partial relief to some; but, accounting for these arcane rules under either approach remains dauntingly complex.
  10.  Participant must submit a Foreign Account or Asset Statement for each previously undisclosed foreign account or asset held during the disclosure period.
  11.  If aggregate highest value is $1 million or more, participant must submit a Foreign Financial Institution Statement for each account or asset previously undisclosed.
  12.   A participant under certain circumstances may avoid filing returns for certain dissolved sham entities merely used for camouflage by submitting a Statement of Dissolved Entities under penalties of perjury.

SOME FEATURES CARRY OVER FROM THE 2009 PROGRAM:

  1. Participants will still have to cooperate fully in answering questions and providing information during the voluntary disclosure process.  Providing false or refusing to provide information will cause a person to be rejected from the program and may lead to criminal prosecution.
  2. Participants and IRS will execute a Closing Agreement on Final Determination Covering Specific matters (Form 906).  This is a contractual final settlement of the specific matters covered but does not preclude IRS from auditing the years covered for other items.
  3. Those already being civilly audited or criminally investigated by the IRS are not eligible for the program.  Preclearance may be requested as follows:
    1. Fax to the CI Lead Development Center:

                                                              i.      Taxpayer name

                                                             ii.      Date of birth

                                                           iii.      Social Security number

                                                          iv.      Address

                                                           v.      Signed Power of Attorney (if requested by representative). The POA must specifically authorize the representative regarding “income tax, civil penalties and FBARs for 2003-2010 years).”

  1. Request pre-clearance in before making an offshore voluntary disclosure.
  2. CI will notify the taxpayer or representative via fax whether or not they are cleared to apply.
  3. Taxpayer so cleared should complete the initial OVDI steps within 30 days.

                                                              i.      Mail OVDI letter to Offshore Voluntary Disclosure Coordinator.

                                                             ii.      CI will notify by mail within 30 days if preliminarily accepted or not accepted into program.

                                                           iii.      The letter will state all acts participant must complete and documents and returns participant must submit before August 31, 2011

  1. Merely filing amended returns with the IRS service center will not qualify as a voluntary disclosure in the eyes of IRS and taxpayers who have made a so called “quiet disclosure” will be subject to the full civil penalty regime and may be criminally prosecuted.  IRS is reviewing amended returns for this purpose. Taxpayers who made quiet disclosures in this fashion can apply to be included in the 2011 OVDI.
  2. Taxpayers who did report all (no de-minims exception) income from an offshore account but failed to file the FBARs or foreign information returns should file the returns with an explanatory statement, or, in the case of Form 5471, file an amended Form 1040.  No penalty will be assessed for late filing of the foreign forms.  CAVEAT:  Taxpayers falling into this category should be interviewed by an attorney initially to make certain, under the umbrella of privilege, that the taxpayer is being truthful and has present no exacerbating factors that would suggest another course of action.  Then a CPA can prepare the return.  The explanation should be reviewed by an attorney again to make sure it is completely truthful and accurate.
  3. Taxpayers in a class of persons covered by a John Doe summons issued by IRS may apply so long as they have not yet been specifically identified.
  4. Hypothetical questions posed to IRS by professionals will be answered by IRS but are not a voluntary disclosure.  A taxpayer who becomes identified while a hypothetical question is pending will not be eligible for the OVDI.
  5. Participants must submit a Taxpayer Account Summary with Penalty Calculation (IRS now supplies an Excel format on its website).
  6. Participant must submit copies of all account statements if aggregate account value exceeds $500,000 (previously there was no stated dollar value for statement submissions).
  7.  Following a timely complete submission a civil examiner in IRS will review the submission for completeness, accuracy and correctness.  This is not a formal audit and a participant may not appeal the examiner’s findings.

 

 

POSTINGS ON IRS.GOV

The IRS has posted the following:

  • 53 Frequently Asked Questions about the 2011 OVDI answering many questions about participating in the program.
  • IR – 2011-14 dated February 8, 2011 describing the program.
  • A list of Submission Requirements indicating what must be submitted before August 31, 2011.
  • Links to all of the Forms required to be submitted including:
    • Form 2848, Power of Attorney.
    • Foreign Financial Institution Statement
    • Foreign Account or Asset Statement
    • Voluntary Disclosure Letter format and content
    • Consent to Extend the Time to Assess Civil Penalties Provided by 31 USC Sec. 5321 for FBAR Violations.
    • Form 872, Extension of Time to Assess Tax
    • Instructions for preparing the above consents to extend the time to assess.
    • Penalty Computation Worksheet.
    • TD Form 90.22-1 (FBAR)
    • Forms 433A and 433B, Collection Information Statements for those individuals or business unable to pay the full tax, penalty and interest before August 31, 2011.

 

 

CONCLUSION

Those with unreported offshore accounts are wise to consult counsel and carefully consider this new program because an IRS posse is hot on the trail of offshore tax scofflaws, safe havens are evanescing amidst new information exchange agreements and mounting international pressure, and escape from jail tickets are certainly becoming rarer and more expensive to procure.      

 

Copyright 2011 by Robert S. Steinberg, All rights reserved.

 

This entry was posted in 2011 OVDI, TAX. Bookmark the permalink.

3 Responses to SECOND IRS OFFSHORE VOLUNTARY DISCLOSURE INITIATIVE

  1. Stone Carlie says:

    Good insight. It’s important to consider the ramifications of this new initiative also I didn’t realize that you can’t already be under investigation by the IRS or participated in the 2009 version of this program to participate in this new initiative. Thanks again for the information. figured I’d share. Thanks!

  2. Hi exceptional blog! Does running a blog like this require a
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