Buoyed by the success of their 2010 Voluntary Disclosure Initiative the Internal Revenue Service announced on February 8, 2011 a Special Voluntary Disclosure Initiative designed to bring offshore funds back into the United States tax net and to assist individuals with undisclosed income from offshore accounts become current with their taxes. The new program is available until August 31, 2011.
Initial Voluntary Disclosure Program
As of October 15, 2009 over 15,000 individuals entered into the voluntary disclosure program. Since then another 3,000 individuals have come forward. Individuals who did not come forward and who have been discovered by the Internal Revenue Service had criminal charges lodged against them and some have been sentenced to jail as well as being subject to significant tax, penalties and interest. The 2010 program required the filing of returns for the prior 6 years as well as imposing a 20% penalty based on the highest amount in the offshore account during that 6 year period.
2011 Offshore Voluntary Disclosure Initiative (OVDI)
Individuals who did not volunteer for the 2010 program will face harsher penalties. Individual will now have to file original and/or amended tax returns for 8 years, 2003 to 2010 and include payment for taxes, interest and accuracy related penalties by August 31, 2011. The 2011 initiative imposes a 25% penalty based on the highest amount in the offshore account during the 2003 to 2010 period. So if an individual had $4,000,000 in an offshore account at any one time during the 8 year period in addition to paying taxes, interest and accuracy related penalties that likely would amount to $1,000,000 the individual would owe another $1,000,000 as a result of the 25% penalty.
Some taxpayers may be eligible for a 5% to 12.5% penalty depending on their particular circumstances. The 5% penalty will apply in limited circumstances. The 12.5% penalty will apply to individuals whose offshore accounts and assets were less than $75,000 in any year from 2003 to 2010.
Why Volunteer?
As noted above, the Internal Revenue Service is not just looking for individuals with millions of dollars in offshore accounts. The penalty increases from 12.5% to 25% at $75,000. Volunteering will be painful, but you can likely avoid criminal prosecution. And if you are caught, the penalties imposed will be significantly higher than 25%.
IRS Commissioner Doug Sluman was quoted, “The new effort gives those hiding money in foreign accounts a tough, fair way to resolve their tax problems once and for all. The initiative offers them the chance to get certainty about how their case will be handled. Just as importantly, those who truly come in voluntarily can avoid criminal prosecution as well. And it gives people a chance to come in before we find them.”
It is not a secret that there are individuals, most of modest means, who do not file U.S tax returns for one reason or another and who balk at just the cost of preparing the prior year tax returns. In retrospect, the tax preparation fee will pale in light of the IRS assessing tax, penalties and interest of 50% to 75% of your net assets.
Report of Foreign Bank and Financial Accounts – Form TD F 90-22.1
The Treasury Department Financial Crimes Enforcement Network issued final regulations last month clarifying who is required to file Form TD F 90-22.1. Under Federal Banking law any U.S. person with a financial interest in or signature authority over, any financial account in a foreign country must file Form TD F 90-22.1 if the value of the account at any time during the calendar year exceeds $10,000. The final regulations define “signature authority” to include the authority of an individual to control the disposition of the funds in the account by direct communication to the person with whom the account is maintained. This includes foreign comingled funds as well as mutual funds. Financial Crimes Enforcement Network is responsible for issuing regulations and the Internal Revenue Service is responsible for enforcing the regulations.