In a recent announcement, the IRS is reminding taxpayers that the deadline for the 2011 Offshore Voluntary Disclosure Initiative (OVDI) will expire on August 31, 2011.

Taxpayers that fully comply with the 2011 OVDI will avoid criminal prosecution and will be able to determine, with a reasonable degree of certainty, the total cost of resolving all offshore tax issues. Taxpayers who do not participate in the voluntary disclosure, face the risk of being detected by the government, an increased risk of criminal prosecution, and the imposition of bigger penalties, including a fraud penalty and foreign information return penalties.

Specifically, under the 2011 OVDI:

  • All taxes and interest due for 2003 – 2010 are to be assessed.  The taxpayer also must file or amend all returns, including information returns and Form TOF 90-22.1, Report of Foreign Bank and Financial Accounts (FBAR).
  • An accuracy-related penalty is to be assessed on all years (no reasonable cause exception may be applied), and failure-to-file and failure-to-pay penalties also must be assessed, where applicable.
  • Instead of all other penalties that may apply, including FBAR and information return penalties, an offshore penalty is to be assessed equal to 25% (or 12.5% or 5% if required conditions are met) of the amount in foreign financial accounts and the value of foreign assets acquired with untaxed funds or producing untaxed income in the year with the highest aggregate account and asset value.
  • The 25% penalty is reduced to 12.5% if the taxpayer’s highest aggregate account balance (including the fair market value of assets in undisclosed offshore entities and the fair market value of any foreign assets that were either acquired with improperly untaxed funds or produced improperly untaxed income) in each of the years covered by the 2011 OVDI is less than $75,000.
  • The 25% penalty is reduced to 5% if the taxpayer: (a) did not open or cause the account to be opened (unless a new account had to be opened upon the death of the owner of the account); (b) exercised minimal, infrequent contact with the account (e.g., to request the account balance); (c) didn’t, except for a withdrawal closing the account and transferring the funds to a U.S. account, withdraw more than $1,000 from the account in any year covered by the voluntary disclosure; and (d) can establish that all applicable U.S. taxes have been paid on funds deposited to the account (only account earnings have escaped U.S. tax).  For funds deposited before Jan. 1, 1991, if no information is available to establish whether such funds were appropriately taxed, it will be presumed that they were. The penalty is also reduced to 5% for taxpayers who are foreign residents and who were unaware that they were U.S. citizens.

Please note that although the IRS has previously indicated that it will provide an extension of up to 90 days to the August 31st deadline in order to prepare and submit necessary documentation, this postponement will apply only if the taxpayer makes a good faith effort to comply with the original deadline.  At the very least, the taxpayers must make the initial disclosure by August 31, 2011, in order to take advantage of the terms of the 2011 OVDI.

Former IRS Tax Attorneys at Holtz Slavett & Drabkin are available to assist you with 2011 OVDI questions and may be reached at (310) 550-6200.

Author: Igor S. Drabkin, J.D., Former IRS Attorney.

Copyright (c) 2011 Igor S. Drabkin.  All Rights Reserved.