Offshore Voluntary Disclosure Program Ends August 31—Beware!
The IRS is offering taxpayers with undisclosed offshore personal and business assets another chance to disclose them and face reduced civil penalties and limited exposure to criminal prosecution.
However, taxpayers must act quickly. The 2011 Offshore Voluntary Disclosure Initiative (2011 VDI) is only available through August 31, 2011. Unlike the prior program in which you only had to indicate your willingness to participate by the deadline, the 2011 VDI requires submission of a complete package to participate.
In the IRS announcement, Commissioner Douglas Shulman was clear: “For those hiding cash or assets offshore, the time to come in is now!”
The IRS is in excellent position to prosecute those who do not take this opportunity, says Larry Chastang, managing principal of international services with LarsonAllen. “The 2009 program provided a staggering amount of information. It didn’t just bring in a tax return or financial disclosure—it gave the government the names of bankers, business associates, lawyers, and CPAs. They have emails to financial institutions and letters regarding transfers. They are mining the information, and they will use it.”
A wide variety of offshore assets
Having undisclosed foreign assets is a complicated issue. Many people with offshore accounts are aware they have a problem, but don’t know how to fix it. Some families have inheritances from grandparents in different countries. Some people retain assets they may have acquired before they became U.S. citizens. In any case, now is the time to straighten out these issues, because the consequences of not doing so will be severe.
A successful 2009 amnesty initiative
The 2011 VDI is the second limited amnesty program the IRS has offered. The first program resulted in more than 15,000 voluntary disclosures before it ended in October 2009, though an additional 3,000 taxpayers came forward after that. These 3,000 taxpayers will be covered by the requirements of the new 2011 VDI.
The overall penalty structure of the 2011 VDI is higher than the 2009 program, which reflects the IRS’ goal of not rewarding taxpayers who wait to come forward.
"Back in December, I asked IRS Commissioner Shulman what percent of the total people with offshore accounts he felt the 18,000 represented,” says Chastang. “He very politely declined to answer. He did say when they were crafting the 2009 initiative, they had estimated only around 1,000 people would take advantage of it, and they were surprised by the response. It’s anyone’s guess just how many will come in under the 2011 VDI.”
2011 VDI
Under the 2011 VDI, taxpayers who haven’t disclosed offshore assets have an opportunity to avoid criminal prosecution if they follow the proper procedures. The taxpayer will be required to:
- File amended tax returns for the years 2003–2010, reporting all previously undisclosed offshore income and pay all applicable income tax and interest resulting from such unreported income.
- File all information returns (e.g., Forms 5471, 3520, etc.) applicable to the undisclosed assets for years 2003–2010.
- Pay an accuracy related penalty based on the additional income tax.
- Pay a failure to file and/or failure to pay penalty, if applicable.
- Pay a penalty of 25 percent of the highest aggregate balance of the undisclosed foreign financial accounts and/or assets during tax years 2003–2010. (In certain circumstances, taxpayers may be eligible for a reduced penalty of 12.5 percent or 5 percent).
How we can help
LarsonAllen’s international services group has a long history of representing taxpayers in international tax controversy matters, including a significant number of voluntary disclosure matters.
Because the 2011 VDI requires all materials and disclosures are complete by the August 31, 2011, deadline, taxpayers must address this issue with a sense of urgency. Chastang believes that for those who don’t take advantage of the 2011 VDI, financial penalties will be severe and criminal prosecutions will be coming.
Larry Chastang, International Services Managing Principal
lchastang@larsonallen.com or 407-802-1200
View our international services principals.