The Internal Revenue Service (“IRS”) is currently offering an amnesty program to encourage taxpayers who have not disclosed their offshore assets to comply with U.S. tax law. The 2011 Offshore Voluntary Disclosure Initiative (“OVDI”), which ends August 31, 2011 and resembles the IRS's 2009 program, offers taxpayers who either maintain undisclosed foreign bank accounts or use foreign entities to conceal offshore investments a way to substantially reduce their potential penalties as opposed to those who do not come forward. Taxpayers who utilize the OVDI will not only lessen their own civil liability, but, perhaps more important, they will also generally reduce the risk of facing criminal prosecution.
Taxpayers who maintain more than $10,000 in foreign bank accounts are required to file a Report of Foreign Bank and Financial Accounts (“FBAR”). Failure to file the FBAR can result in penalties “as high as the greater of $100,000 or 50 percent of the total balance of the foreign account.” In addition, taxpayers failing to disclose foreign accounts or income risk criminal prosecution.
The 2011 OVDI includes the following terms and conditions:
- OVDI participants must pay a penalty of 25% of the amount in the foreign bank accounts for the year with the highest aggregate account balance from 2003 to 2010.
- Taxpayers whose offshore accounts or assets did not surpass $75,000 in any calendar year covered by the 2011 initiative will qualify for a lower penalty of 12.5%. In some limited situations, participants may be eligible for a rate of 5%.
- OVDI participants must pay back taxes and interest for up to eight years.
- Participants must also pay normal penalties for the late payment of taxes and late filing of returns, if any.
- Taxpayers who truthfully, timely and completely comply with all provisions of the OVDI will not be referred to the Department of Justice for criminal prosecution according to IRS policy.
In recent years, the IRS has been more successful in obtaining foreign bank account records that are then used to build criminal tax cases against individuals who failed to report foreign accounts or income on their tax returns. For example, in 2009, as part of its settlement with U.S. tax authorities, Swiss Bank UBS AG agreed to turn over the account records for approximately 4,450 account holders who were suspected of maintaining foreign accounts to evade taxation. These records, as well as records obtained from other foreign banks, have provided evidence for numerous criminal prosecutions.
The 2009 Voluntary Disclosure Program offered taxpayers a limited opportunity to disclose foreign account information and pay the associated penalties, while allowing them to avoid criminal prosecution. The 2011 OVDI offers taxpayers a “second chance” to make voluntary disclosures and thereby, avoid more serious consequences. However, the deadline is rapidly approaching. For those wishing to seek relief, all original and amended tax returns and payments must be filed by August 31. Taxpayers with questions about their eligibility for the program are advised to consult with experienced tax counsel.
© 2011 Perkins Coie LLP