To: Clients Who Disclosed Foreign Financial Accounts To The IRS After The 2009 Voluntary Disclosure Program Ended And Before The 2011 Voluntary Disclosure Initiative Began
From: Rubinstein & Rubinstein, LLP
The previous IRS Offshore Voluntary Disclosure Program (OVDP) was effective from March 26, 2009 to October 15, 2009. The current IRS Offshore Voluntary Disclosure Initiative (OVDI) is effective from February 8, 2011 to August 31, 2011.
There are US taxpayers who determined to voluntarily disclose their foreign accounts to the IRS after the expiration of the 2009 OVDP. There was little guidance regarding the terms of such a post-2009 disclosure, including an ambiguity as to the penalties that would apply.
The terms of the recently announced 2011 OVDI will apply to taxpayers who began their disclosures after the expiration of the 2009 OVDP and before the 2011 OVDI. Many of the OVDI terms are similar to those of the OVDP, but there are a few noteworthy differences that clients must keep in mind.
The terms of the OVDI are:
– Taxpayers must declare and pay taxes on all foreign income from 2003 through 2010. Under the 2009 OVDP, the years in question were 2003 through 2008. Thus, the OVDI covers the past eight years, not six. Participants will be required to sign waivers of their statute of limitations rights (usually six years). Amended tax returns are required for these past eight years.
– In addition to paying back taxes on foreign income, taxpayers must pay interest on the back taxes, as well as a 20% accuracy penalty on the back taxes due (no change from OVDP).
– In lieu of penalties that would otherwise apply (e.g., penalties for filing a false tax return, penalties for failure to file FBAR forms, fraud penalties, etc.), the IRS will impose a penalty of 25% of the highest aggregate balance in the foreign accounts over the years 2003-2010 (compare to 20% of the highest balance 2003-2008 under the OVDP).
– However, if the value of the account at no point exceeded $75,000, the penalty will be 12.5% of the highest aggregate balance (this was not available in the OVDP).
– In certain cases, under closely scrutinized facts, the penalty will be 5%. This is only applicable for accounts that the taxpayer did not set up (e.g., inherited accounts), where the taxpayer had very minimal contacts with the accounts, did not exercise control over the accounts, withdrew minimal funds (less than $1,000 per year) and all US taxes were paid on the principal deposits or the principal deposits were not subject to US taxation (similar relief was available in the OVDP).
– If taxpayers did not file tax returns or pay taxes due, non-filing and non-payment penalties will apply.
– Taxpayers must submit copies of their previously filed tax returns, as well as amended tax returns showing foreign income, as well as any tax returns applicable to foreign entities (e.g. Form 3520 and 3520A for foreign trusts, Form 5471 for foreign corporations, etc.), if the taxpayer’s foreign account involved such an entity.
– Taxpayers must submit correct FBARs for the years 2003 through 2010.
– If the foreign accounts were valued in excess of $500,000, taxpayers must submit copies of the bank statements. If the foreign accounts were valued less than $500,000, taxpayers should have the statements on hand in case the IRS requests them.
– All of the documentation (original and amended tax returns, FBARs, bank statements) as well as payment of tax and all penalties, must be submitted to the IRS in one package before August 31, 2011. There will be no extensions (for e.g., delays in obtaining statements from foreign banks, calculation of taxes due, etc.). Given the possible delays in obtaining statements from foreign sources, calculating foreign income and the special rules applicable to PFIC (Passive Foreign Investment Company) investments (foreign mutual fund and hedge fund investments are considered by the IRS to be PFICs, which require more complex tax methodologies), early attention to these requirements is mandatory.
– The 2011 OVDI includes within the reach of the 25% penalty (or 12.5% or 5%, if applicable), the value of all foreign assets, not only bank or securities accounts. Foreign insurance and annuity policies, real estate, art and intellectual property are included. The penalties also apply to the value of such non-financial foreign assets, if those assets are not tax compliant (e.g., if foreign rental income was not declared, if the foreign assets were purchased with undeclared taxable funds). Crucially, the potential reach of the OVDI penalties could include the full value of real estate and businesses located offshore, if they are not tax compliant, and the penalties would be significantly greater than the penalties under the 2009 OVDP.
While many of the conditions are the same as during the 2009 program, the 2011 program presents substantial differences with respect to the past eight tax years in question, the applicable penalties, and the expansive reach of those penalties to non-compliant assets beyond foreign financial accounts. In addition, the final end-date of August 31, 2011 also presents a non-flexible, firm deadline for what could be complex, time consuming issues. Still, the new terms allow taxpayers to become tax compliant, settle their foreign issues with certainty and avoid criminal prosecution.
Please contact us with any questions.