On February 8, 2011, the IRS announced a second special voluntary disclosure program—the 2011 Offshore Voluntary Disclosure Initiative (OVDI)—designed to bring U.S. taxpayers with undisclosed offshore financial accounts back into the U.S. tax system and provide them with a mechanism for resolving their tax issues related to unreported income from overseas accounts. This new Initiative applies to calendar years 2003 through 2010 and covers individuals as well as entities such as corporations, trusts and partnerships. It is scheduled to close after August 31, 2011.
For taxpayers that enter into the program and complete all of the requirements by August 31, 2011, the OVDI eliminates the risk of criminal prosecution and provides for lesser civil penalties than would apply if the taxpayer’s noncompliance came to the IRS’s attention through other means. The 2011 OVDI generally offers taxpayers less favorable terms than those available under the 2009 Offshore Voluntary Disclosure Program which ended in October 2009. In addition to paying any taxes and interest due for the years 2003 through 2010, eligible taxpayers must also pay a penalty equal to 25% of the highest aggregate account balance in their foreign bank accounts during those years. This penalty replaces all other civil penalties 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 situations taxpayers can qualify for a 5% penalty rate.
Taxpayers participating in the program must file all original and amended income tax returns for the years affected and include payment for taxes, interest and accuracy-related penalties by the August 31, 2011 deadline. Because there are multiple steps in a submission, taxpayers are advised to start the process well in advance of the August 31, 2011 deadline.
In a related matter, the IRS has advised 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. Instead, those taxpayers should just file the delinquent FBAR reports and attach a statement explaining why the reports are filed late. The IRS has stated they will not impose penalties 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).