2011 Offshore Voluntary Disclosure Initiative


August 19, 2011 UPDATE – Time is running out to reap the benefits of this program – look here.  Click here for a discussion of the benefits.

While private clients may be regaining confidence in UBS, many people still have a bad taste in their mouth following the Internal Revenue Service investigation into domestically held foreign bank accounts that started gaining steam in 2008.  Some folks who thought their nest egg was accruing interest in Switzerland free from US income tax found out that either, they were getting caught with their hand in the cookie jar, or that their hand was in the cookie jar and they were about to get caught.  Either way, the news was out that the IRS was making a list and checking it twice to see if you’d filed your annual Report of Foreign Bank and Financial Accounts (FBAR).  If not, in the eyes of the IRS, you were conspiring to defraud the United States government.  The federal government doesn’t take kindly to being defrauded and they set about sharpening their skewers.

Of course, there were many many people who just never thought, for example, that the bank account they opened while working for the London branch was necessary to disclose to the US Government.  The thought process often goes something like this, “It was a five year stint in the UK; I paid my income taxes to the UK while I was there; I filed my US income tax returns while I was there; I just never got around to closing the account after my return to San Francisco; I don’t know why I didn’t just close the account, but I never thought it was a big deal…”

Or, perhaps you knew full well that you should be disclosing the account and the income but were relying on the anonymity offered by your foreign bank.  You should know that Criminal tax prosecutions by the federal government hit a 10-year high in 2010, powered in part by a continuing crackdown on offshore tax evasion by wealthy Americans.

United States persons are required to file an FBAR if:

  1. The United States person had a financial interest in or signature authority over at least one financial account located outside of the United States; and
  2. The aggregate value of all foreign financial accounts exceeded $10,000 at any time during the calendar year to be reported.

The IRS has been somewhat sympathetic to the fact that many people’s failure to disclose was based on ignorance rather than a willful intent to defraud, but the Service is not so understanding to just let it go.  The Service decided the majority of cases didn’t warrant criminal investigation.  Thus, in 2009, the IRS offered taxpayers the opportunity to avoid investigation by the Criminal Investigation division (IRS-CI) by providing the taxpayer an opportunity to voluntarily come forward to disclose their bank foreign accounts under the Offshore Voluntary Disclosure Initiative (OVDI).  By doing so, taxpayers would also be able to avoid some of the laundry list of penalties that would ordinarily be applied if they were to get caught by the IRS rather than voluntarily disclosing the accounts.  Given the number of Swiss and other foreign banks that were coerced by the government to turnover US account holder names, the chance of getting caught by the IRS made a lot of people rightfully nervous.

In September of 2009, Russell Stanaland let you know about the initial Amnesty for Offshore Accounts.  The IRS is offering people with undisclosed income from offshore accounts another opportunity to participate in a new, voluntary disclosure initiative in order to get current on their tax returns. The 2011 Offshore Voluntary Disclosure Initiative (OVDI) will be available only through Aug. 31, 2011.  If you have been kicking yourself for not disclosing by October 15, 2009, now is your chance!

According to the IRS:

The 2011 initiative has a higher penalty rate than the IRS’s previous voluntary disclosure program but offers benefits to encourage taxpayers to disclose foreign accounts now rather than risk IRS detection and possible criminal prosecution.  In addition, the 2011 initiative includes new guidelines to provide fairness to people with smaller amounts of undisclosed assets or unusual situations.  Calendar year taxpayers must include tax years 2003 through 2010 in which they have undisclosed foreign accounts and/or undisclosed foreign entities.  Fiscal year taxpayers must include fiscal years ending in calendar years 2003 through 2010.

As tax professionals, we have experience helping you navigate the disclosure program, the details of which can be somewhat daunting to the uninitiated.  My experience interacting with the Service Agents assigned to the disclosure program has been positive thus far.  The agents understand the difficulties that can be involved obtaining records from foreign institutions and have been flexible regarding timing as long as we’ve remained communicative about the status of the client’s efforts to comply with the disclosure requirements.

Should you disclose?  Do you feel the IRS stalking you from the shadows?  Contact us at 415-781-4000 or send an email to arrange a free consult.