February 24, 2011
Dave Wolf, Esq.
On February 8, 2011, the U.S. Tax Authorities (the IRS) announced a second Offshore Voluntary Disclosure Initiative (the "2011 OVDI") intended to bring more taxpayers into compliance with the tax rules and bring offshore money back into the U.S. tax system.
The 2011 OVDI follows the 2009 Offshore Voluntary Disclosure Initiative ("2009 OVDP"), which was effective from March through October of 2009 and elicited disclosures from about 15,000 taxpayers and an additional 3,000 afterwards. However, the overall penalty structure for the 2011 OVDI is higher than the penalty structure that was in place for the 2009 OVDP. Without the 2009 and 2011 Voluntary Disclosure Programs, the taxpayer could face severe civil and/or criminal penalties.
Filing Requirements
Each United States person who has a financial interest in or signature or other authority over any foreign financial accounts, if the aggregate value of the accounts exceed $10,000, must report that relationship for each calendar year by filing a Form TD F 90-22.1 ("FBAR") with the Department of the Treasury on or before June 30 of the succeeding year.
Penalties
Under the 2011 OVDI, taxpayers with previously undisclosed foreign accounts assets, and income may be able to avoid criminal prosecution and may be able to limit their exposure to civil penalties if they meet all the requirements on or before August 31, 2011.
Pursuant to the new framework, taxpayers will be required to
| (i) | file amended tax and information returns including the FBAR form with respect to the years from 2003 to 2010; | |
| (ii) | pay all taxes and interest due with respect to such returns (including any accuracy or delinquency penalties), and | |
| (iii) | pay a penalty equal to 25% of the amount in foreign offshore accounts in the year with the highest aggregate account balance covering the 2003 to 2010 time period. The 25% penalty may be reduced to 12.5% for taxpayers with aggregate offshore accounts of less than $75,000 for each calendar year covered by the 2011 OVDI. The 2011 OVDI also retains a 5% reduced penalty from the 2009 OVDP program and sets forth specific criteria that must be satisfied to obtain this reduced penalty. | |
What to do
Taxpayers with undisclosed foreign accounts, assets, and income should consider participating in the 2011 OVDI and should not wait too long since gathering records and preparing proper amended returns can take some time. IRS Commissioner Douglas H. Shulman noted that "Combating international tax evasion is a top priority for the IRS. We have additional cases and banks under review. The situation will just get worse in the months ahead for those hiding assets and income offshore. This new disclosure initiative is the last, best chance for people to get back in the system."
This compliance issue will become even more pressing in 2013, when the U.S. Foreign Accounts Tax Compliance Act provisions need to be implemented by foreign banks. These provisions impose an obligation for foreign banks to identify certain financial payments to their U.S. clients to the U.S. Authorities.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances. Our tax department regularly advises taxpayers in connection with voluntary disclosure of foreign accounts, assets, and income.
Dave Wolf is a U.S. and Israeli tax attorney and a partner at Hacohen Wolf Law Offices and can be reached at 02-6222335. Hacohen Wolf is a law firm specializing in Real Estate, Taxation and Commercial Law with offices in Jerusalem, Beit Shemesh, Tel-Aviv and New York.