Time Running Out to Participate in 2011 OVDI

July 10, 2011

In February 2011, the IRS announced the 2011 Offshore Voluntary Disclosure Initiative. Motivated by the success of previous disclosure programs -- and the federal government's urgent need for more revenue -- the 2011 OVDI is designed to get taxpayers with offshore financial accounts into compliance and to recoup the money in offshore accounts into U.S. tax coffers. It does this by allowing U.S. citizens, green card holders, and U.S. tax residents with previously undeclared offshore accounts to become current with their taxes.

FBAR Reporting Requirement for Offshore Accounts

For over 40 years, the Bank Secrecy Act has required those with a financial interest in or signatory control over an account in a foreign country with a balance of at least $10,000 at any time in a given year to file a Report of Foreign Bank and Financial Accounts for that year.

Foreign account holders need to file FBARs (Foreign Bank Account Reporting) in addition to declaring the income from their accounts on their income taxes. What makes the FBAR requirement somewhat complicated is that account holders do not include the FBAR with their tax forms; account holders simply indicate on Schedule B that they need to file FBARs and then complete the forms and mail them to an address in Michigan. The deadline for filing an FBAR is different than the deadline for filing income tax returns, as well: FBARs are due by June 30th of the year following the year which the FBAR covers. There are no extensions available for filing the FBAR.

Willful failure to file an FBAR can result in criminal penalties and civil fines of $100,000 or 50 percent of the account balance, whichever is greater, for each year since 2004 that the account holder failed to file. Even if the failure to file was inadvertent, the IRS can fine the account holder up to $10,000 per year since 2003 that the account holder failed to file.

Prior Amnesty

The IRS had a prior amnesty program, the 2009 Offshore Voluntary Disclosure Program, which ended October 15, 2009. In exchange for voluntary disclosure, the IRS did not criminally prosecute the account holders who had failed to file FBARs and assessed reduced civil fines. The 2009 OVDP yielded 15,000 responses from those who had previously failed to file FBARs, as well as an additional 3,000 responses after the 2009 deadline.

2011 OVDI Initiative

In contrast to the 2009 program, the IRS is strictly enforcing the August 31, 2011 deadline for the 2011 OVDI. Those who fail to meet the deadline risk criminal prosecution if they come forward after the deadline. It is also important to note that FBARs for 2010 were still due June 30, 2011 - even for those participating in the 2011 disclosure program for previous years.

The monetary penalties for voluntary disclosure are higher under the 2011 program than in 2009. Those disclosing assets under the 2011 initiative will need to pay back taxes plus interest on their assets if they have not done so already, as well as a penalty equal to 25 percent of the highest amount in the account between 2003 and 2010. However, the IRS created a special lower penalty rate of 12.5 percent for those whose account balances did not exceed $75,000 in any one calendar year.

Despite the higher penalties under the 2011 initiative than the 2009 program, holders of offshore accounts still have clear incentives to participate in the 2011 OVDI. Failure to disclose offshore assets leaves account holders open to criminal prosecution in addition to even higher civil fines than those set for voluntary disclosure.

Time is of the essence under the 2011 OVDI. If you are uncertain about whether you need to disclose offshore assets to the IRS, do not hesitate to contact an experienced tax attorney who can guide you through the complex maze of IRS regulations.

Article provided by Law Offices of Jeffrey S. Freeman
Visit us at www.freemantaxlaw.com