IRS Announces Second Special Offshore Voluntary Disclosure Initiative (OVDI)
On February 8, 2011, the IRS issued an announcement entitled: “Second Special Voluntary Disclosure Initiative Opens; Those Hiding Assets Offshore Face Aug. 31 Deadline” via IR-2001-14, available here.
The decision to “open a second special disclosure initiative follows continuing interest from taxpayers with foreign accounts. The first special voluntary disclosure program closed with 15,000 voluntary disclosures on Oct. 15, 2009. Since that time, more than 3,000 taxpayers have come forward to the IRS with bank accounts from around the world. These taxpayers will also be eligible to take advantage of the special provisions of the new initiative.” United States persons (U.S. citizens and resident aliens, among others) have an obligation under the Bank Secrecy Act (BSA), codified in Title 31 of the United States Code to report to the U.S. Department of the Treasury their foreign bank and financial accounts. The official Form TD F 90-22.1 (Report of Foreign Bank and Financial Accounts) is available here.
Of particular note is that the penalty framework is as follows:
- 25% of the amount in the foreign bank accounts in the year with the highest aggregate account balance covering the 2003 to 2010 time period;
- 12.5% penalty for offshore accounts with less than $75,000;
- 5% for those that (a) did not open or cause the account to be opened (unless the bank required that a new account be opened, rather than allowing a change in ownership of an existing account, upon the death of the owner of the account); (b) have exercised minimal, infrequent contact with the account, for example, to request the account balance, or update accountholder information such as a change in address, contact person, or email address; (c) have, except for a withdrawal closing the account and transferring the funds to an account in the United States not withdrawn more than $1,000 from the account in any year covered by the voluntary disclosure; and (d) can establish that all applicable U.S. taxes have been paid on funds deposited to the account (only account earnings have escaped U.S. taxation). For funds deposited before January 1, 1991, if no information is available to establish whether such funds were appropriately taxed, it will be presumed that they were.
The IRS also issued a series of frequently asked questions and answers (FAQs), available here.
However, what is significant in the IRS announcement is the absence of any mention of Passive Foreign Investment Company (PFIC) taxation. The PFIC taxation regime (what some would characterize as draconian in nature) is found in the Internal Revenue Code at sections 1291-1298, available here.
U.S. taxpayers are required to file Form 8621, available here.
The lack of disclosure by the IRS that IRS auditors may be seeking to impose taxation on the foreign bank account(s) pursuant to the PFIC regime may surprise those taxpayers that initial entered the first voluntary disclosure program, or that may be considering the second voluntary disclosure program. The result is that the income tax due, plus penalties and interest may be substantially higher than initially anticipated by the taxpayer (and in some instances by his/her taxation professional). A further discussion on PFIC taxation, and its inter-relation to the voluntary disclosure program will be a subject of a separate discussion.
The attorneys at Fuerst Ittleman, PL have extensive experience in voluntary disclosures, PFIC taxation, Controlled Foreign Corporation (CFC) taxation, and tax litigation.