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Mary Bernard
Mary Bernard

Foreign Reporting Voluntary Disclosure Initiative — Round Two

Taxpayers will now have a second chance to become compliant on foreign asset disclosure by August 31, 2011.

February 24, 2011
by Mary Bernard, CPA

The Internal Revenue Service (IRS) announced recently that taxpayers will have a second chance to voluntarily disclose their foreign holdings in order to become compliant with foreign reporting requirements. The first initiative which expired in October of 2009 allowed more than 15,000 taxpayers to become compliant with information reporting requirements for foreign bank accounts and offshore assets. The new initiative — called the 2011 Offshore Voluntary Disclosure Initiative (OVDI) — includes some changes from the original 2009 Offshore Voluntary Disclosure Program (OVDP). The new penalty structure is higher than in the original program, providing no reward to those who waited to comply. There are, however, some additional favorable features in the new initiative.

There is a new penalty framework requiring payment of 25 percent of the amount in foreign bank accounts in the year with the highest aggregate account balance during the 2003 to 2010 time period covered under the voluntary disclosure. Some taxpayers may be eligible for a reduced 5 or 12.5 percent penalty. All participants must also pay back taxes and interest for up to eight years as well as any accuracy related or delinquency penalties. All original or amended tax returns and payment of all taxes, interest and accuracy related penalties must be remitted by the August 31, 2011 deadline.

A new penalty category of 12.5 percent will apply to smaller offshore accounts. Taxpayers with foreign accounts or assets not in excess of $75,000 in any year covered under the voluntary disclosure will qualify for the new lower penalty rate.

Eligible Taxpayers

All entities, including corporations, partnerships and trusts, with undisclosed foreign accounts or assets are eligible to participate in the program. Those taxpayers who have filed amended returns may have already attempted a so-called "quiet disclosure" to include proper foreign disclosures. These taxpayers are still eligible to apply for the program and the IRS is encouraging them to apply. Without the protection of the OVDI, taxpayers who have made a quiet disclosure could still be subject to examination, higher penalties and have potential exposure to criminal prosecution for all applicable years, without limitation. The OVDI will limit the applicable years of noncompliance, eliminate criminal prosecution as well as limit penalties assessed.

If the IRS has initiated an examination of the taxpayer's tax returns, regardless of whether or not the issues addressed include undisclosed foreign accounts or entities, the taxpayer is not eligible to apply for disclosure under this program. If the taxpayer is under criminal investigation by the Criminal Investigation unit of the IRS they will also not be eligible.

Application Process

To begin the application process, a taxpayer may first request pre-clearance through the Criminal Investigation Lead Development Center by providing name and identifying information by fax to 215-861-3050 specifying a request for pre-clearance for OVDI. The taxpayer will be notified by return fax if they have clearance to apply to participate in the program. Pre-clearance is not required and does not guarantee acceptance into the program.

An offshore voluntary disclosure is submitted by completion of the Offshore Voluntary Disclosure Letter to the Voluntary Disclosure Coordinator in Philadelphia, PA. The information included in this letter, such as the explanation of the source of the foreign funds, the highest value of the offshore accounts by year and all potential unreported income during this time period, will enable the Voluntary Disclosure Unit to determine eligibility into the program. It is expected that within 30 days the taxpayer will receive a response indicating whether their disclosures have been accepted or declined. The response will indicate instructions for submission of the complete package necessary for disclosure to the IRS Austin, Texas campus.

The complete package required upon acceptance into the program will include:

  • Copies of completed original (and previously amended, if applicable) income tax returns for all tax years covered by the voluntary disclosure;
  • Complete and accurate amended returns for the same periods, including schedules of the previously omitted income from the foreign account or entity;
  • A completed Foreign Account or Asset Statement for each previously unreported account or asset for each period covered by the voluntary disclosure (form available at the IRS website);
  • For disclosure of financial account in excess of $1 million, a completed Foreign Financial Institution Statement for each institution with undisclosed accounts or transactions (form available at IRS website);
  • Properly completed and signed Taxpayer Account Summary with Penalty Calculation (form available at IRS website);
  • Check payable to the Department of Treasury for tax, interest, accuracy-related penalty and, if applicable, failure to file and failure to pay penalties for the voluntary disclosure period;
  • For any disclosure of financial accounts with balances in excess of $500,000 in any year, all bank statements for the disclosure period must be provided;
  • Properly completed and signed agreements to extend the period of time to assess tax and penalties, including the Report of Foreign Bank and Financial Accounts (FBAR) penalties.

Each case will be assigned to an examiner and reviewed on a first-come, first served basis. The certification process of the review under this program is less formal than an examination and does not carry the rights and legal consequences of an examination. The taxpayer will not have appeal rights with respect to the final determination. The examiner, however, has the right to request any relevant documents and make third-party contacts if necessary to certify accuracy of documentation provided. Once the examiner has received all documentation required to certify the voluntary disclosure request, most cases should be completed expeditiously.

Conclusion

Taxpayers who may have missed the first opportunity to request voluntary disclosure treatment for foreign activities should act by August 31, 2011 for a second chance at a limited look-back, lower penalties and elimination of exposure to criminal penalties. When or if, the IRS may decide to offer this opportunity again, it is unlikely to be a better offer.

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Mary F. Bernard, CPA, is director — income/franchise tax, at the Dallas, Texas-headquartered tax services firm of Ryan. Bernard formerly worked as principal, director of State & Local Tax Services, at Providence, RI-basedKahn, Litwin, Renza & Co., Ltd.