March 4, 2017
The 2011 IRS Offshore Voluntary Disclosure Initiative
In February 2011, the IRS announced its 2011 Offshore Voluntary Disclosure Initiative (OVDI), a program that would allow those with offshore assets who had not previously declared and paid taxes on them to become current in their tax obligations. Motivated by the success of past disclosure programs and the need to collect unpaid taxes on assets that U.S. citizens, green card holders and tax citizens hold overseas, the voluntary disclosure period is an opportunity to avoid prosecution for criminal tax violations in exchange for paying back taxes and a fine.
The Banking Secrecy Act obligates U.S. citizens, green card holders, corporations and tax citizens with foreign accounts that have a balance of at least $10,000 (at any point in the calendar year) to file a Report of Foreign Bank and Financial Accounts (FBAR) informing the IRS of the accounts and the balance in them. The taxpayer is then responsible for paying the appropriate taxes on that money. The 2011 OVDI applies to those who failed to file the necessary FBAR to disclose their offshore accounts to the IRS during the years of 2003-2009.
To participate in OVDI, taxpayers need to request OVDI preclearance by faxing the taxpayer’s name, date of birth, social security number and address to the IRS Criminal Leads Development Center. After preclearance, the taxpayer must send a completed Voluntary Disclosure Letter, which details the amount of undeclared assets and income along with asset information. The IRS mails the taxpayer a Voluntary Disclosure Packet if he or she is accepted into the program. Taxpayers need to have the completed packet returned to the IRS by the program deadline. The IRS extended the deadline for participation in the program from the initial date of August 31, 2011 to September 9 due to Hurricane Irene.
Those who participate in the program will have to pay back taxes on their foreign assets, along with a penalty of 25 percent of the highest aggregate balance of offshore assets. However, taxpayers who participate in OVDI avoid criminal prosecution for tax crimes, which can result in significant jail and substantial criminal and civil fines. The penalty for willfully failing to file an FBAR is up to five years in prison or a $250,000 fine, or both, for each year the taxpayer was supposed to file an FBAR. Those who fail false FBARs also face up to five years in prison, a $10,000 fine or both.
Even if the failure to file an FBAR was inadvertent, the IRS can still assess civil fines of $10,000 per year if the IRS discovers a taxpayer was supposed to file and did not. Willful failure to file an FBAR also subjects a taxpayer to civil fines along with the criminal penalties. The IRS can levy a fine of the greater amount of either 50 percent of the aggregate amount of the offshore assets or $100,000 if it discovers a taxpayer willfully failed to file an FBAR.
The IRS has stepped up enforcement of declaring offshore assets. The IRS has formed the Global High-Wealth Industry Group within its Large Business & International Group, charged with the task of auditing high wealth individuals, companies, LLCs, S-corporations, partnerships, private foundations and trusts and focusing on their offshore activities.
If you have questions about disclosing your offshore assets to the IRS or would like to disclose your assets and missed the OVDI deadline, seek the guidance of an experienced tax attorney who can discuss your situation with you and explain your options.