Second IRS Voluntary Disclosure Program for Undeclared Foreign Accounts

In early February, 2011, the Internal Revenue Service announced a second voluntary disclosure program for U.S. citizens with undisclosed offshore bank accounts. The 2011 Offshore Voluntary Disclosure Initiative (OVDI) is different from the IRS's 2009 voluntary disclosure program in significant ways, and it carries unique opportunities and penalties for people who choose to participate.

Importantly, U.S. citizens with undeclared foreign bank accounts may come forward under the 2011 OVDI and avoid criminal prosecution for tax evasion if they file all original and amended tax returns and pay all taxes, interest and related penalties by August 31, 2011.

Although both programs offer participants the chance to avoid the risk of criminal consequences, the 2011 OVDI has different rules than the 2009 voluntary disclosure program. The main difference is the 2011 OVDI's overall penalty structure, which is higher to prevent people benefiting from not participating in the 2009 program. In addition to the changed penalties, the 2011 disclosure program also differs in the years it applies to and the program's deadlines.

Changes in the 2011 Offshore Voluntary Disclosure Initiative

  • Increased Penalties: Participants in the 2011 OVDI must pay interest and a 25 percent penalty on their total tax deficiencies. In addition, they must pay a penalty equal to 25 percent of their highest aggregate account balance over the past eight years. For the 2009 voluntary disclosure program, the percentages were 20 percent.
  • Reduced Penalties: U.S. citizens who inherited undeclared foreign bank accounts but had little contact with them, withdrawing less than $1,000 a year may qualify for a reduced 5 percent penalty. So may foreign resident U.S. citizens born to foreign parents in the U.S. who grew up abroad not knowing of their U.S. citizenship. Also, taxpayers whose undisclosed offshore accounts' balances were never greater than $75,000 in the years covered by the program may be eligible for a reduced 12.5 percent penalty.
  • Years Covered: The 2011 OVDI requires taxpayers to pay back-taxes, interest and penalties on any undisclosed offshore bank accounts for the eight-year period of 2003-2011. The 2009 voluntary disclosure program only covered six years, from 2003-2009.
  • Deadlines: People seeking to declare foreign bank accounts under the 2011 OVDI have less time to participate. 2011 OVDI participants must submit all necessary returns to the IRS by the August 31, 2011, deadline. 2009 participants only had to declare their intent to participate in the program by its deadline.

The 2011 OVDI is particularly tough on people with dual citizenship. If a dual citizen held his or her assets in the country of her other citizenship, yet displayed no intent to hide the assets, the dual citizen may be penalized on his or her entire net worth if he or she has no U.S. accounts.

When announcing the 2011 OVDI, IRS Commissioner Doug Shulman said that combating international tax evasion is a top priority for the IRS. Therefore, participating in the second voluntary disclosure program may be a desirable option for some people. However, before taking any action, it is very important to consult with an experienced tax lawyer. If you are considering participating in the 2011 Offshore Voluntary Disclosure Initiative or declaring other undisclosed assets, contact a knowledgeable tax attorney to discuss your options.

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