By Thomas E. Zehnle, Steven R. Dixon and Kevin G. Mosley
By now, nearly everyone (or at least everyone with enough money to have a foreign bank account) has heard about the UBS account fracas and the end of Swiss bank-account secrecy. If you didn't know that your clients have to report foreign accounts to the government, you certainly know now. Maybe you're hoping that the government won't notice the account. Or maybe you haven't had the time to deal with disclosing the account. For the procrastinators and risk-takers of the world, the IRS has a "new" deal for you-voluntarily identify your foreign financial accounts and other offshore income-producing assets, get straight with the American taxman, and you don't have to worry about IRS agents knocking on your door-or snooping in your trash.
Now, if this all sounds somewhat familiar, it should. This is the second time since 2009 that the IRS has offered a deal for those willing to come clean. On February 8, the IRS announced its 2011 Offshore Voluntary Disclosure Initiative, which follows the fairly successful 2009 Offshore Voluntary Disclosure Program that officially closed in October 2009 after accepting almost 15,000 voluntary disclosures. Like the earlier program, the current initiative is meant to provide "consistency and predictability to taxpayers"-provided they fulfill the program's requirements on or before August 31. Like its predecessor, the 2011 OVDI couples ordinary voluntary disclosure-which dramatically minimize the chance that a taxpayer will face criminal prosecution for tax violations-with the promise of consistency and leniency on the civil side by "defining the number of tax years covered and setting the civil penalties that will apply."
More specifically, the disclosure period for the 2011 OVDI includes the 2003-2010 tax years. Taxpayers who participate in the 2011 OVDI will:
Avoid criminal prosecution for tax violations related to their failure to report their previously undisclosed foreign accounts and assets;
Limit examination of their foreign bank account activity occurring before the disclosure period;
Avoid paying offshore account-related information penalties, including the penalty for failure to file a Report of Foreign Bank and Financial Accounts (FBAR) that can amount, by itself, to 50% of the total value of the unreported foreign assets for each year the assets go unreported;
In lieu of the FBAR and related penalties, pay a one-time miscellaneous offshore account penalty no greater than 25% of the highest total value of the foreign account or asset occurring during the disclosure period;
Pay a 20% accuracy-related penalty on the full amount of underpayments for the period;
Pay any applicable failure to file or failure to pay penalties;
Submit copies of all previously filed returns and file complete and accurate amended or original returns;
Pay all applicable tax and interest; and
Provide information regarding their foreign accounts, banks and bankers.
"Tell On Myself, Part Two" is, on balance, good news for taxpayers who, for whatever reason, have yet to disclose their offshore accounts and assets. Because they too can opt into the 2011 OVDI, this announcement is good news for the 3,000 taxpayers who made voluntary disclosures after the close of the 2009 OVDP and were therefore ineligible for the more lenient tax and penalty regime it offered. The 2011 OVDI is-for most taxpayers-a better deal than they would get if they disclosed their offshore accounts outside of the OVDI regime.
With the 2011 OVDI, the IRS attempts to build upon its experience administering the 2009 OVDP by streamlining or eliminating several of the 2009 OVDP's more irksome elements. For example, the 2011 OVDI guidance now specifies the information that the IRS expects to see on the power-of-attorney form that practitioners file on behalf of individuals making voluntary disclosures. The IRS's demand for magic language on those forms in the 2009 OVDP was a seemingly innocuous issue, but it unnecessarily increased costs for clients and it gave clients the impression that their representatives could not properly fill out basic forms. In addition, the IRS appears to have systematized elements of the civil audit process associated with the voluntary disclosure by insisting that taxpayers' disclosures be documented in a "package" that includes the following new forms:
Foreign Account or Asset Statement;
Foreign Financial Institution Statement; and
Taxpayer Account Summary (with Penalty Calculation).
In the 2009 OVDP, the information for these forms was provided to the IRS in work papers created by taxpayer representatives and provided to individual civil agents in a somewhat hit-or-miss fashion, an incremental process that developed mostly through trial and error. Ideally, these forms will save OVDI participants the cost of submitting and resubmitting calculations.
One notable aspect of the 2011 OVDI is its detailed guidance about how taxpayers are to account for and report investments in foreign mutual funds that the IRS treats as "passive foreign investment companies," or "PFICs." That guidance presents taxpayers with an alternative method for determining PFIC tax that is effectively the same as-although slightly more detailed than-the alternative method of determining the tax on PFICs that eventually emerged, at the urging of private practitioners, under the 2009 OVDP.