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Insights & Alerts
May 9, 2011

2011 Offshore Voluntary Disclosure Initiative
By Lewis Kevelson and Tracee Handy

In February 2011, the IRS announced a special voluntary disclosure initiative, The 2011 Offshore Voluntary Disclosure Initiative (OVDI).  The provisions of the initiative offer taxpayers a reduced penalty framework in exchange for full disclosure of unreported offshore accounts. 

There are several reasons for taxpayers with undisclosed foreign accounts or entities to make a voluntary disclosure.  These reasons include avoiding substantial civil penalties and eliminating the risk of criminal prosecution.  The failure to file the required forms can result in substantial penalties which may include:

  • A penalty for the failure to file Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (FBAR).  The willful failure to do so is a felony punishable by a fine of $250,000 or five years in jail or both.  The civil penalty for the willful failure to file the FBAR is the greater of $100,000 or 50 percent of the account balance; and the penalty can be imposed on an annual basis.  A negligent failure to file an FBAR is subject to a civil penalty of $10,000 per violation.
  • A penalty for failure to file Form 3520, Annual Return to Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts - The penalty for failing to file, or for filing an incomplete form is the greater of $10,000 or 35 percent of the gross reportable amount.
  • A penalty for failure to report the receipt of a gift or bequest of more than $100,000 from a nonresident alien individual or a foreign estate.  The penalty is five percent of the gift per month, up to a maximum penalty of 25 percent of the gift.
  • A penalty for failing to file Form 3520-A, Information Return of Foreign Trust With a U.S. Owner.  The penalty for failing to file, or for filing an incomplete return, is five percent of the gross value of trust assets owned by the United States person.
  • A penalty for failing to file Form 5471, Information Return of U.S. Persons with Respect to Certain Foreign Corporations.  The penalty for failing to file each one of these information returns is $10,000, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50,000 per return.
  • A penalty for failing to file Form 5472, Information Return of a 25 percent Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business.  The penalty for failing to file each one of these information returns, or to keep certain records regarding reportable transactions, is $10,000, plus an additional $10,000 per month for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency.  There is no maximum additional penalty.
  • A penalty for failing to file Form 8865, Return of U.S. Persons With Respect to Certain Foreign Partnerships.  Penalties include $10,000 for failure to file each return, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50,000 per return, and ten percent of the value of any transferred property that is not reported, subject to a $100,000 limit.

Voluntary disclosure also provides the opportunity to calculate, with a reasonable degree of certainty, the total cost of resolving all offshore tax issues.  Under the terms of the 2011 Offshore Voluntary Disclosure Initiative, taxpayers must agree to the following:

  • Provide copies of previously filed original (and, if applicable, previously filed amended) federal income tax returns for tax years covered by the voluntary disclosure;
  • Provide complete and accurate amended federal income tax returns (for individuals, Form 1040X, or original Form 1040 if delinquent) for all tax years covered by the voluntary disclosure, with applicable schedules detailing the amount and type of previously unreported income from the account or entity (e.g., Schedule B for interest and dividends, Schedule D for capital gains and losses, Schedule E for income from partnerships, S corporations, estates or trusts).
  • File complete and accurate original or amended offshore-related information returns  and Form TD F 90-22.1 (Report of Foreign Bank and Financial Accounts) for calendar years 2003 through 2010;
  • Cooperate in the voluntary disclosure process, including providing information on offshore financial accounts, institutions and facilitators, and signing agreements to extend the period of time for assessing tax and penalties;
  • Pay 20% accuracy-related penalties under IRC § 6662(a) on the full amount of your underpayments of tax for all years;
  • Pay failure to file penalties;
  • Pay failure to pay penalties;
  • Pay, in lieu of all other penalties that may apply, including FBAR and offshore-related information return penalties, a miscellaneous Title 26 offshore penalty, equal to 25% (or in limited cases 12.5% or 5%) of the highest aggregate balance in foreign bank accounts/entities or value of foreign assets during the period covered by the voluntary disclosure;
  • Submit full payment of all tax, interest, accuracy-related penalty, and, if applicable, the failure to file and failure to pay penalties with the required submissions set forth in FAQ 25 or make good faith arrangements with the IRS to pay in full, the tax, interest, and these penalties (see FAQ 20 for more information regarding a taxpayer's ability to fully pay) (the suspension of interest provisions of IRC § 6404(g) do not apply to interest due in this initiative); and
  • Execute a Closing Agreement on Final Determination Covering Specific Matters, Form 906.

The disclosure period for the 2011 OVDI includes tax years 2003 through 2010.  Taxpayers who wish to enter the OVDI must submit all necessary documents to the IRS no later than August 31, 2011.  Individuals currently under examination, or under criminal investigation, cannot participate.

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