Tax Insights

Your Guide to State, Local, Federal, Estate + International Taxation

IRS’ Second (and Last) Settlement Offer of Reduced Penalties for Offshore Tax Evaders – Part 1

On February 8, 2011, the IRS announced a second special voluntary disclosure initiative called the 2011 Offshore Voluntary Disclosure Initiative (OVDI) which will be available through Aug. 31, 2011.  It will give taxpayers with undisclosed income from hidden offshore accounts for the 2003—2010 period the chance to get current with their taxes.  Taxpayers who fully comply with the offer will be able to calculate, with a reasonable degree of certainty, the total cost of resolving all offshore tax issues and will avoid criminal prosecution.

To take advantage of the 2011 OVDI, taxpayers must:

• Provide copies of previously filed original (and, if applicable, previously filed amended) federal income tax returns for tax years 2003 through 2010 in which they have undisclosed foreign accounts and/or undisclosed foreign entities.
• Provide complete and accurate amended federal income tax returns (for individuals, Form 1040X, or original Form 1040 if delinquent) for all tax years covered by the voluntary disclosure, with applicable schedules detailing the amount and type of previously unreported income from the account or entity (e.g., Schedules B, D and E).
• File complete and accurate original or amended offshore-related information returns and Form TD F 90-22.1 (Report of Foreign Bank and Financial Accounts, also known as an FBAR) for calendar years 2003 through 2010.
• Cooperate in the voluntary disclosure process, including providing information on offshore financial accounts, institutions and facilitators, and signing agreements to extend the period of time for assessing tax and penalties.
• Pay (a) 20% accuracy-related penalties on the full amount of underpayments of tax for all years; (b) failure to file penalties, if applicable; and (c) failure to pay penalties, if applicable.
• Pay, instead of all other penalties that may apply, a miscellaneous offshore penalty equal to 25% (or in limited cases 12.5% or 5%) of the highest aggregate balance in foreign bank accounts/entities or value of foreign assets during the period covered by the voluntary disclosure.
• Submit full payment of all tax, interest, accuracy-related penalty, and, if applicable, the failure to file and failure to pay penalties, or make good faith arrangements with IRS to pay in full, the tax, interest, and these penalties.
• Execute a Closing Agreement on Final Determination Covering Specific Matters, Form 906.

The IRS encourages those taxpayers who have filed amended returns and paid any related tax and interest for previously unreported offshore income without otherwise notifying the IRS, i.e. “quiet disclosure”, to come forward under the voluntary disclosure offer to avoid the risk of being examined and potentially criminally prosecuted for all applicable years.

See Part 2 for information on the reduced penalties and additional information on the initiative.

Jennie Ward, J.D., LL.M