IRS Offers a Second Special Offshore Voluntary Disclosure Initiative

March 18, 2011, 8:27 AM

On February 8, 2011, the IRS announced a second voluntary offshore disclosure initiative. The original program, which ran from March 23, 2009 through October 15, 2009, resulted in approximately 15,000 voluntary disclosures being made by taxpayers by the closing date and more than 3,000 additional disclosures from taxpayers after the closing date. Stating that its goal is to bring taxpayers back into compliance with the U.S. tax system, the Tax Commissioner continued to stress that a top goal of the IRS is to combat international tax evasion. As such, the IRS has developed the 2011 Offshore Voluntary Disclosure Initiative (OVDI) designed to assist taxpayers with complying with their U.S. tax obligations. The deadline for submission is August 31, 2011.

One of the big differences in the 2011 program is the change in the penalty structure, which is designed to not reward the taxpayers who did not come forward in the 2009 program, but is designed to grant some relief for smaller offshore accounts. Specifically, the penalty is equal to 25 percent of the amount of the foreign bank accounts in the year with the highest aggregate balance over the last eight years (tax years 2003 - 2010). There is some relief for smaller offshore accounts which may result in a reduced penalty equal to 12.5 percent or 5 percent, as applicable. By way of comparison, the 2009 program offered a 20 percent penalty and included the past six years.

The process for a taxpayer wishing to come forward can include three parts. First, the taxpayer (or a designated representative) may choose (but is not required) to submit a pre-clearance request to the IRS Criminal Investigation Unit including only the taxpayer's name, date of birth, social security number, address and, if applicable, power of attorney. This request will be reviewed to determine if the taxpayer is cleared to participate in the OVDI, but does not guarantee acceptance into the program.

Second, once the taxpayer receives notification of his/her pre-clearance, the taxpayer would then have 30 days to submit a completed voluntary disclosures letter. If the taxpayer opted to not receive a pre-clearance notification, the taxpayer would just submit the voluntary disclosures letter. The IRS would review the letter and respond as to whether the voluntary disclosure is preliminarily accepted or declined.

Third, once the taxpayer receives a preliminary acceptance of the voluntary disclosure, the taxpayer would have until August 31, 2011 to submit a full voluntary disclosure package and include the payments for taxes, interest and accuracy-related penalties.

Recently, the IRS launched a new section on its website explaining these procedures and providing guidance. Please click here for more information. --Elaina L. Blanks