Friday, June 3, 2011

IRS Makes New Offer for Offshore Accounts

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On February 8 the IRS unveiled its second voluntary disclosure program for U.S. taxpayers with undisclosed foreign financial accounts. The program bears many similarities to the first disclosure program that ended on October 15, 2009, which resulted in approximately 15,000 taxpayers disclosing their offshore accounts.

The IRS announcement states that, since the closure of the 2009 program, an additional 3,000 taxpayers have made voluntary disclosures using the traditional guidelines of its Criminal Investigation division. Those taxpayers are now eligible for the new program.

Like most amnesty programs, this one makes it harder on those who did not take advantage of the earlier disclosure opportunity. The taxpayer is liable for taxes and penalties on the most recent eight years (2003 to 2010), rather than the six years in the 2009 program. And the FBAR penalty in the new program is 25% (rather than 20%) of the highest account balance in the undisclosed accounts during the eight-year period. Because the penalty is based on the highest year, the gains in the equity markets since 2009 may make this settlement even more painful for taxpayers who ignored the 2009 program.

The new program does throw a few crumbs to account owners with lesser culpability. The FBAR penalty is reduced to 12.5% for those whose offshore assets never exceeded $75,000 during the reporting period. And if the taxpayer can show that: (1) he did not open the account (e.g., it was acquired by gift or inheritance); (2) there was minimal activity in the account; (3) withdrawals never exceeded $1,000 in any one year; and (4) the account was funded with "clean" money, then a 5% FBAR penalty will apply. There are also special penalty provisions for PFIC investors who have run afoul of the FBAR reporting requirements.

Further information can be found on the IRS website. The program ends on August 31, 2011. To hear more about this program, join our webinar, Evaluating the Second Voluntary Disclosure Initiative, on Friday, February 18, 2011.

Harold W. Pskowski, Managing Editor for U.S. International Tax

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