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Updated Breaking News: Late on Monday, August 29, 2011, the IRS issued a statement extending the due date for certain late filed information returns from August 31, 2011 to September 9, 2011 due to Hurricane Irene. The information returns include certain Form TD F 90-22.1, Form 5471, and Form 3520, as described in the 2011 Offshore Voluntary Disclosure Initiative (OVDI) FAQs #17 and #18. See article for more information.
Breaking News: Late on August 26, 2011, the IRS issued a statement extending the due date of OVDI filings from August 31, 2011 to September 9, 2011, due to the potential impacts of Hurricane Irene. However, this does initially does not appear to affect the August 31, 2011 due date for filings under FAQs #17 and #18. See article for more information.
On February 8, 2011, the IRS announced the 2011 Offshore Voluntary Disclosure Initiative (OVDI), designed to bring offshore money back into the U.S. tax system and help people with undisclosed income from hidden offshore accounts get current with their taxes. The OVDI covers calendar years 2003 to 2010, and is available through August 31, 2011 for individuals as well as entities such as corporations, trusts and partnerships.
As with other programs in the past, the OVDI eliminates the risk of criminal prosecution for taxpayers that are accepted into the program, and provides for reduced civil penalties than would apply if the IRS were to discover the taxpayer’s noncompliance in this area. The terms of the 2011 OVDI differ from the terms of the 2009 Offshore Voluntary Disclosure Program (OVDP). In general, taxpayers will pay taxes for eight years and will pay an offshore penalty of 25% of the highest aggregate account balance in the taxpayer’s foreign bank accounts during the years 2003 through 2010. This offshore penalty is in lieu of all other penalties that might apply, except for the failure to file, failure to pay, and accuracy-related penalties. Taxpayers with offshore accounts of less than $75,000 in each calendar year covered by the OVDI will qualify for a 12.5% penalty rate. In very limited circumstances will taxpayers qualify for a 5% rate, including the case of a foreign resident who was unaware they were considered U.S. citizens.
Participants in the OVDI must pay the back taxes and interest for up to eight years as well as the accuracy-related and/or delinquency penalties. The participants must file all original and amended income tax returns for the affected years and include payment for taxes, interest and accuracy-related penalties by the August 31, 2011 deadline. As there are multiple steps involved in a submission under the OVDI, taxpayers will need to start well in advance of the August 31, 2011 deadline.
The IRS has made numerous resources available immediately with the announcement of the program, including a frequently asked questions list (FAQ) that initially included 53 Q&A items. The FAQ includes many important pieces of information that taxpayers and practitioners will find especially helpful. Some highlights include:
- overview of the 2011 OVDI;
- key features of the 2011 OVDI, including details on the terms and penalties, as well as an alternative computation to resolve passive foreign investment company (PFIC) issues;
- eligibility for the 2011 OVDI, including information for those taxpayers who may have previously filed a “quiet” disclosure;
- the 2011 OVDI process;
- calculating the offshore penalty;
- statute of limitations;
- FBAR questions;
- taxpayer representatives information, including responsibilities under Circular 230 and a sample Form 2848, Power of Attorney and Declaration of Representative; and,
- case resolution.
One other significant item of note regarding the OVDI is that taxpayers who properly reported all taxable income from foreign accounts and paid the associated federal income tax, but who did not file all required annual Forms TD F 90-22.1, Report of Foreign Bank and Financial Accounts (FBAR), should not use the OVDI, but rather are advised by the IRS to just file the delinquent FBAR reports and attach a statement explaining why the reports are filed late. The IRS has indicated that they will not impose a penalty for the failure to file the delinquent FBARs if there are no underreported tax liabilities and the FBARs are filed by August 31, 2011 (or by the June 30, 2011 due date for calendar 2010 FBARs). Similar guidance exists for other tax information returns such as Form 5471, Information Return of U.S. Persons With Respect To Certain Foreign Corporations.
Circular 230 Responsibilities:
Tax practitioners should be aware of the IRS position in FAQ 47, which asks the question:
|| I have a client who may be eligible to make a voluntary disclosure. What are my responsibilities to my client under Circular 230?
The IRS response to FAQ 47 provides:
(Note that the IRS updated their website to reflect the above modified response on March 14, 2011.)
The IRS anticipates that taxpayers will seek qualified tax and legal advice and representation in connection with considering and making a voluntary disclosure. If a taxpayer seeks the advice of a tax practitioner, the practitioner must exercise due diligence in determining the correctness of any oral or written representations made to the client about the program and the implications for that taxpayer of going forward. If the taxpayer decides to proceed with the disclosure, the practitioner must exercise due diligence in determining the correctness of any oral or written representations that the practitioner makes during the representation to the Department of the Treasury; and must avoid giving, or participating in giving, false or misleading information to the Department of the Treasury or giving a false or misleading opinion to the taxpayer. If the taxpayer decides not to make the voluntary disclosure despite the taxpayer’s noncompliance with United States tax laws, Circular 230 requires the practitioner to advise the client of the fact of the client’s noncompliance and the consequences of the client’s noncompliance. A practitioner whose client declines to make full disclosure of the existence of, or any taxable income from, a foreign financial account during a taxable year, may not prepare the client's income tax return for that year without being in violation of Circular 230. [Emphasis added.]
IRS Resources regarding 2011 OVDI:
08.26.2011 IRS Statement
regarding OVDI Deadline Extended, including new FAQ #24.1, and revised FAQ #25.1
03.08.2011 IRS News Release that OVDI information available in 8 foreign languages, including Chinese (traditional and simplified), Farsi, German, Hindi, Korean, Russian, Spanish and Vietnamese
03.01.2011 IRS Memorandum on Authorization to Apply Penalty Framework to Voluntary Disclosure Requests with Offshore Issues
2011 OVDI Frequently Asked Questions and Answers
from IRS (originally posted February 8, 2011, with updates by the IRS on February 10, 2011, February 14, 2011, March 14, 2011, June 2, 2011, August 19, 2011, August 26, 2011, and August 29, 2011.)
2011 OVDI Documents and Forms
, including links to foreign financial institution statement, foreign account or asset statement, offshore voluntary disclosures letter, consent to extend FBAR statute, consent to extend statute to assess tax, penalty computation spreadsheet, sample Form 2848 – Power of Attorney and Declaration of Representative
Submission Requirements from IRS
How to Make a Voluntary Disclosure
2011 OVDI General Information from IRS
02.08.2011 IRS News Release
introducing the 2011 OVDI
Commissioner Douglas Shulman’s Statement 02.08.2011 announcing the 2011 OVDI