IRS Commissioner Douglas H. Shulman announced at a February 8 news conference in Washington, D.C., that the Service has opened a second offshore voluntary compliance initiative (OVCI) patterned on a similar 2009 program. In exchange for full disclosure of unreported offshore accounts, the IRS offers taxpayers a reduced penalty framework. The initiative is scheduled to run through August 31, 2011.
2009 Initiative
In 2009, the IRS invited taxpayers with undisclosed foreign bank accounts to reveal their assets in exchange for a reduced penalty framework. According to Shulman, more than 15,000 taxpayers participated in the 2009 initiative and the Service has collected nearly $400 million.
"After our last program closed in 2009, we have had continued interest from taxpayers looking to get back into the tax system," Shulman said (IR-2010-122; TAXDAY, 2010/12/10, I.3). In response, the IRS is launching a new program. However, the new initiative is less generous than the old one, he cautioned.
2011 Initiative
The objective of the 2011 initiative, like the 2009 program, is to bring taxpayers into compliance, Shulman explained. "We believe there are many people out there who will come forward," he said. Taxpayers who choose not to participate run the risk, among other things, of detection by the Service and substantial penalties. The initiative is open to individuals and entities, such as corporations, trusts and partnerships. However, individuals currently under examination, or under criminal investigation, cannot participate.
Penalty Framework
"For the 2011 initiative, there is a new penalty framework that requires individuals to pay a penalty of 25 percent of the amount in the foreign bank account in the year with the highest aggregate account balance covering the 2003 to 2010 period," Shulman explained. Some taxpayers may be eligible for lower penalties of 12.5 percent or 5 percent, he added.
"The 12.5-percent penalty category is for small offshore accounts (less than $75,000)," according to Shulman. The 5-percent penalty may apply to a taxpayer who did not open or cause the account to be opened if additional requirements are met. Individuals who are foreign residents and who were unaware they are U.S. citizens also may be eligible for the 5-percent penalty, the IRS explained in frequently asked questions (FAQs).
The FAQs are well thought out, much more clear than the FAQs covering the 2009 initiative, Neal Sullivan, chair of the AICPA's FBAR task force, told CCH. Sullivan also noted that passive foreign investment company reporting is simplified under the voluntary disclosure initiative using Code Sec. 1296 mark-to-market regime compared with statutory requirements under Code Secs. 1291 to 1298.
Participation
Taxpayers must file all original and amended returns and include payment for taxes, interest and accuracy-related penalties by August 31, 2011. To request participation in the 2011 initiative, taxpayers should contact the IRS at Offshore Voluntary Disclosure Coordinator, 600 Arch Street, Room 6404, Philadelphia, Pa. 19106. Taxpayers experiencing difficulties in obtaining records from foreign banks should contact the IRS at 267-941-0200.
"I offer a word of advice to procrastinators: the 2011 program ends August 31, 2011," Shulman said. "Taxpayers will need to provide all of their paperwork before August 31."
Worksheet and Materials
The IRS has posted a penalty computation worksheet on its website. The worksheet asks taxpayers to disclose aggregate account balances over the requisite years. The IRS also posted a brief guide to the various stages of the initiative from requesting pre-clearance, to submitting a voluntary disclosure letter and subsequently submitting a voluntary disclosure package. The additional information can be found at http://www.irs.gov/newsroom/article/0,,id=234900,00.html.
Banks
In other news, Shulman said that the Service continues to investigation allegations of tax evasion facilitated by foreign financial institutions (TAXDAY, 2010/10/22, I.6). Shulman declined to reveal any details of the investigations.
