Tax, Trusts & Estates Law Monitor : Estate Planning Lawyer & Attorney : Cole Schotz Meisel Forman & Leonard Law Firm : NJ, Mid-Atlantic Gift Tax & Trust Issues

In February 2011 the IRS announced the Offshore Voluntary Disclosure Initiative (OVDI) for taxpayers with undisclosed foreign accounts.  This program was a follow up to a program initiated by the IRS in 2009 on the same topic following civil and criminal cases brought by the Department of Justice against Swiss bank UBS AG seeking the release of information concerning secret accounts maintained by U.S. persons with the Swiss bank.  Approximately 15,000 taxpayers came forward under the 2009 program which required the payment of taxes on omitted income going back to 2003, a 20% penalty on those back taxes and a 20% miscellaneous penalty on the high balance of the undisclosed foreign account between 2003 and 2008. 

Under the 2011 OVDI, subject to limited circumstances where a reduced penalty may apply, the miscellaneous penalty has been increased by 5% to 25% of the high balance and taxpayers must still pay the taxes on omitted income going back to 2003.  The new program expires August 31, 2011, but can be extended by up to 90 days under certain circumstances.

The February 2011 OVDI is similar to the 2009 program with some exceptions including an increase in the penalty from 20% to 25%, and an eight year lookback rather than a six year lookback on back taxes.  Taxpayers who do not come forward face much more severe penalties including a fraud penalty equal to 75% of the back taxes and a miscellaneous penalty equal to 50% of the high balance each year (potentially 300% in the aggregate) as well as possible criminal prosecution.

Guidance issued in June 2011 expands eligibility for a 5% penalty (in lieu of a 25% penalty) and clarifies the procedure for individuals choosing to “opt out” of the OVDI.  Those who "opt out" are subject to a more detailed audit and penalties will be determined following the completion of that exam. Cole Schotz Partner Jeffrey Schechter was recently quoted on this issue in the following article titled, "IRS Guidance on Offshore Asset Disclosure Program Perceived Beneficial to Taxpayers" published by BNA Daily Tax Report, which provides some insight into the new guidance. Also, all of the updated frequently asked questions pertaining to the OVDI can be found here.

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The IRS recently announced a second voluntary disclosure program to encourage US taxpayers to reveal their foreign assets, file tax returns for missing years and otherwise come into compliance with the tax laws.

The IRS had a similar voluntary disclosure program which ended in 2009 and resulted in approximately 15,000 taxpayers entering the program, well more than the IRS anticipated.

“Voluntary disclosure” is a long-term IRS policy that a taxpayer who may have committed a tax crime can disclose and correct past wrongs, and in doing so, avoid criminal prosecution. Correcting past wrongs generally includes filing or amending tax returns for prior years and paying all related taxes, interest and penalties.

The new voluntary disclosure program carries stiffer penalties than the first program, reflecting a policy choice that delinquent taxpayers should not be rewarded for waiting. To enter into the new program, a taxpayer must file complete and accurate original or amended returns, any related information returns, including Form TD F 90-22.1, also known as an “FBAR,” which reports the taxpayer’s foreign bank accounts, cooperate in the voluntary disclosure process, and pay all interest and penalties. Under the new program, taxpayers must pay accuracy related penalties, failure to file and failure to pay penalties (if applicable), and also pay an additional penalty generally equal to 25% of the highest aggregate balance in the foreign bank account during the period covered by the voluntary disclosure.

There is a reduced penalty structure for taxpayers whose offshore accounts or assets did not surpass $75,000 in any calendar year, and for certain other taxpayers who did not open the account or had minimal contact with it.

The program reflects the IRS’ increasingly aggressive approach to enforcing the tax laws in the international area. The IRS recently opened offices in several other counties, particularly in Asia, as part of these efforts. The agency continues to negotiate mutual assistance agreements with other countries’ tax authorities. Moreover, recent legislation (the Foreign Account Tax Compliance Act or “FATCA”) requires foreign banks to disclose information about account holders with US ties. In short, the US landscape for international taxpayers is changing dramatically. For those not in compliance, it is getting more and more difficult to hide.

The deadline for the program is August 31. If you desire further information about the voluntary disclosure program, please contact us.
 

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The Internal Revenue Service (IRS) said it will aggressively prosecute people with undisclosed foreign bank accounts.  At the same time, the agency recently announced a program that can help people avoid prosecution and reduce their financial exposure.  David Kohane, a member of the Litigation Department and Jeffrey Schechter, a member of the Tax, Trusts & Estates Department, had an article on the subject published on July 2, 2009 in the "Ask The Experts" column of The Record.  Click here to read the article.

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