This is Your Final offer? New 2011 offshore Voluntary Disclosure Initiative

February 16, 2011

The IRS recently announced a new, special limited-time voluntary disclosure initiative designed to bring income from offshore assets back into the U.S tax system. This is a second chance to comply for those who have income from undisclosed offshore accounts and did not take advantage of the previous voluntary disclosure program, which expired October 15, 2009. The 2011 Offshore Voluntary Disclosure Initiative (OVDI) will be available for full submissions completed by August 31, 2011.

The 2011 initiative has a higher penalty rate than the IRS's previous Voluntary Disclosure Program, which ended in October of 2009, but offers clear benefits to encourage the disclosure of foreign accounts and assets now rather than risk IRS detection and possible criminal prosecution. In addition, the 2011 initiative includes new, limited guidelines to provide fairness to people with smaller amounts of undisclosed assets or unusual situations.

If you have a foreign bank account holding more than $10,000 at any time during the year, you must check the "yes" box on Schedule B to your IRS Form 1040 disclosing it.  You must report your worldwide income including any foreign earnings even if they are taxed abroad.  Plus, you must file an FBAR annually (Treasury Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts).  Separate from tax returns, FBARs are due each June 30 for the preceding year.

About 15,000 taxpayers responded to the voluntary disclosure program in 2009. Since the October 15, 2009 deadline, about 3,000 more have come in under the IRS's pre-existing voluntary disclosure.  Those 3,000 can opt to come in under the new 2011 program. One of the best reasons for taking advantage of the offer is that those who do are less likely to be criminally prosecuted and there are reduced FBAR and income tax penalties.

The 2011 voluntary disclosure program involves paying back income taxes and interest on any income not reported, plus a 20% penalty on those back taxes.  There is also an FBAR penalty equal to 25% of the amount in the foreign account(s), as opposed to 20% with the first voluntary disclosure program.

A reduced penalty of 12.5% penalty is available for those whose offshore accounts or assets did not surpass $75,000 in any calendar year between 2003 and 2010. In certain additional limited circumstances, a further reduced penalty rate of 5% could apply. The 2011 program provides additional guidance for qualifying for these lowered penalties. 

For more information, contact your Perelson Weiner partner.

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