IRS 2011 Offshore Voluntary Disclosure Initiative – Cost of Disclosure vs. Non-Disclosure

Are you Feeling Lucky?

You may be on the fence as to whether you want to raise your hand and tell the IRS you’ve been moving money around overseas for the past 20 years.  You may also be considering rolling the dice and betting that you won’t be caught.  Of course, one risk you’re running is criminal prosecution and potential jail time if you’re caught.  But let’s focus on the monetary advantage offered by participation in the initiative.  Below I will walk you through a sample scenario offered by the IRS to show you just how much money you are risking by not disclosing. Keep in mind, the deadline to disclose is only days away!

The Taxpayer Comes Forward

Here is how it works if you choose to participate in the plan.  The values of your accounts and other assets are aggregated for each year and the penalty is calculated at 25 percent of the highest year‘s aggregate value during the period covered by the voluntary disclosure. The period in play when participating in the program are the years 2003-2010.   For example, assume the taxpayer has the following amounts in a foreign account over the period covered by his voluntary disclosure.

Year Amount on Deposit Interest Income Account Balance
2003 $1,000,000 $50,000 $1,050,000
2004 $50,000 $1,100,000
2005 $50,000 $1,150,000
2006 $50,000 $1,200,000
2007 $50,000 $1,250,000
2008 $50,000 $1,300,000
2009 $50,000 $1,350,000
2010 $50,000 $1,400,000

NOTE: This example does not provide for compounded interest, and assumes the taxpayer is in the 35-percent tax bracket, does not have an investment in a Passive Foreign Investment Company (PFIC), files a return but does not include the foreign account or the interest income on the return, and the maximum applicable penalties are imposed.

If the taxpayers comes forward and their voluntary disclosure is accepted by the IRS, they face this potential scenario:

They would pay $518,000 plus interest. This includes:

  • Tax of $140,000 (8 years at $17,500) plus interest,
  • An accuracy-related penalty of $28,000 (i.e., $140,000 x 20%), and
  • An additional penalty, in lieu of the FBAR and other potential penalties that may apply, of $350,000 (i.e., $1,400,000 x 25%).

The Taxpayer Rolls the Dice on Not Getting Caught

If the taxpayers don’t come forward, if the IRS discovers their offshore activities, they would face up to $4,543,000 in tax, accuracy-related penalty, and FBAR penalty. The taxpayers would also be liable for interest and possibly additional penalties, and an examination could lead to criminal prosecution.

The civil liabilities outside the 2011 Offshore Voluntary Disclosure Initiative potentially include:

  • The tax, accuracy-related penalties, and, if applicable, the failure to file and failure to pay penalties, plus interest, as described above,
  • FBAR penalties of 50% of the account balance of each year.  This totals up to $4,375,000 for willful failures to file complete and correct FBARs (2004 – $550,000, 2005 – $575,000, 2006 – $600,000, 2007 – $625,000, 2008 – $650,000, and 2009 – $675,000, and 2010 – $700,000),
  • The potential of having the fraud accuracy penalty of 75% apply, and
  • The potential of substantial additional information return penalties if the foreign account or assets is held through a foreign entity such as a trust or corporation and required information returns were not filed.

Note that if the foreign activity started before 2003, the Service may examine tax years prior to 2003 if the taxpayer is not part of the 2011 OVDI.

The Bottom Line

As you can see, participation in the program comes in at an approximate cost of $518,000 plus interest and non-participation comes in at an approximate cost of up to $4,543,000.  In many scenarios, being caught outside the benefits of the program will result in the tax, penalty and interest consuming more than the value of the offshore accounts.  Then there is the jail time to consider.  I hope this helps put things in prospective in a language we can all understand, dollars and cents.

As Clint Eastwood once inquired, are you feeling lucky?  If not, your time is running out as the August 31, 2011 deadline is quickly approaching.  Give us a call – 415-781-4000.

Also, California has a similar initiative available from August 1, 2011 to October 31, 2011.  Find details here.