IRS’ Offshore Voluntary Disclosure Initiative OVDI Available until August 31st 2011

09 Jun IRS’ Offshore Voluntary Disclosure Initiative OVDI Available until August 31st 2011

The purpose of the Offshore Voluntary Disclosure Initiative (OVDI) as I understand it today is to provide reasonable assurance to a taxpayer who comes forward, before an investigation is started, that if they truthfully disclose all facts and circumstances about their unreported offshore account and all unreported income is reported now, they will be relieved of the risk of prosecution. Not entering the OVDI program whatsoever is a very serious decision with far reaching implications.  Very Big Brother-esque.

This is essentially the IRS’ attempt to offer taxpayers another new, voluntary disclosure initiative in order to get current on their tax returns. The 2011 Offshore Voluntary Disclosure Initiative (OVDI) is available only through Aug. 31, 2011. However, taxpayers who made a good faith effort to comply may be eligible for an extension.

The 2011 initiative has a higher penalty rate than the IRS’s previous voluntary disclosure program, which ended on Oct. 15, 2009, but offers clear benefits to encourage taxpayers to disclose foreign accounts now rather than risk IRS detection and possible criminal prosecution. In addition, the 2011 initiative includes new guidelines to provide fairness to people with smaller amounts of undisclosed assets or unusual situations. For general details on the 2011 initiative, see news release IR-2011-14, Second Special Voluntary Disclosure Initiative Opens; Those Hiding Assets Offshore Face Aug. 31 deadline.

Further details about this initiative are provided in a series of questions and answers (revised June 2, 2011) put together by the IRS.

How to Participate

Several documents are needed to participate in the initiative. Taxpayers interested in the new voluntary disclosure initiative can get complete details here:

questions and answers and How to Make a Voluntary Disclosure.

Additional details on the 2011 initiative, including contact points, mailing addresses, and OVDI deadlines should be reviewed as well.

Related Items:

• Field Directive Memorandum: Authorization to Apply Penalty Framework to Voluntary Disclosure Requests with Offshore Issues

• Details on the traditional IRS Voluntary Disclosure Program outside of the 2011 initiative.

• Information on the original 2009 Offshore Voluntary Disclosure Program ending on Oct. 15, 2009.

• Memorandum and guidance regarding the steps to be taken before and after a taxpayer opts out or is removed from the civil settlement structure of the 2009 OVDP or the 2011 OVDI

Entering the 2011 OVDI program means that among other things, all applicants must pay the amount of tax, interest, a 20% accuracy related penalty and if applicable, failure to file penalties at the time of submission of the voluntary disclosure letter. A limited exception is provided if full payment cannot be made at the time of submission. All non filed FBAR’s and other non filed information returns must also be filed. The miscellaneous civil penalty (FABR – 25% of the highest single year aggregate value ofthe taxpayer’s foreign financial assets) will be determined by the revenue agent who audits the voluntary disclosure and submitted documents. The FBAR penalty is proposed at the end of the audit and then the tax payer has the option of agreeing or “opting out”. It is worth a very careful consideration of the time and expense of getting to the “opt-out” point when making the decision to enter or not enter the OVDI program. Unfortunately there is no guidance whatsoever for those taxpayers who wish to not to enter the OVDI program whatsoever other than threats of prosecution. An inappropriate “opt-out” can result in possible referral for prosecution, and in a willful case FBAR penalties of 50% of account balances per year and civil fraud penalties of 75% of the tax per year.  It gets expensive.