New Offshore Voluntary Disclosure Initiative

By Stuart Lyons January 1, 2012

How to potentially reduce penalties for late reporting of foreign holdings

Just in the last month, the IRS opened a new voluntary disclosure program related to foreign asset reporting. This article provides a brief overview of the renewed program.

Background

Treasury Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (“FBAR”) must be filed annually by many parties holding certain financial accounts outside the U.S. It generally must be filed by June 30 if the holdings exceeded $10,000 at any time during the previous year. Unusually harsh penalties may be assessed on non-filers. This article does not attempt to explain, in detail, the filing requirements. Instead, it assumes the reader is somewhat familiar with those requirements and provides new information related to accommodating past due filings. More information regarding the filing requirements in general may be found in a previous BNN article and on the IRS website.

New voluntary disclosure initiative

To encourage non-filers to “come clean” the IRS has offered programs in the past that allow reduced penalties for late filers. On January 9, 2012, the IRS reopened the Offshore Voluntary Disclosure Initiative program (“OVDI”) following continued strong interest from taxpayers and tax practitioners after the closure of similar 2011 and 2009 programs. This third offshore program, explained in IRS news release IR 2012-05, comes as the IRS continues working on a wide range of international tax issues and follows ongoing efforts with the Justice Department to pursue criminal prosecution of international tax evasion. This program will be open for an indefinite period until otherwise announced. The program is similar to the 2011 program in many ways, but with a few key differences.

Outside of the OVDI program, penalties for not timely filing FBAR forms can equal the greater of $100,000 or 50% of the highest historical balance in each account. For certain violations the IRS believes are non-willful, that penalty may be reduced to $10,000. If the IRS determines there was reasonable cause for non-filing, the penalty may be eliminated. The IRS has tremendous discretion in allowing or denying these penalty reductions.

A taxpayer can take advantage of reduced penalties by participating in the OVDI program. The overall penalty structure for the new program is similar to the one offered in 2011, except for taxpayers in the highest penalty category. Generally, the otherwise applicable 50% penalty will be capped at 27.5%, with the opportunity for reduction to 12.5% if account balances consistently were below $75,000. An opportunity to reduce the penalty to 5% exists if various other criteria are met.

To be clear, two options exist for late filers to begin filing: File under the OVDI program, or file without it. Filing outside the protection of OVDI carries the risk of extremely high penalties but also the possibility of no penalties. Your success is heavily dependent on your fact pattern, IRS discretion and your ability to establish a “reasonable cause” exception to the penalties. This alternative carries the biggest possible upside and downside. By contrast, use of the OVDI program ensures payment of some level of penalties (based on your fact pattern), but the penalties pale in comparison to the worst available outside of the program and the outcome is much less dependent on IRS discretion. A taxpayer complies with requirements outside of the OVDI program by filing Form TD F 90-22.1 with a statement asserting reasonable cause attached for each year. Additionally, the taxpayer may have to amend at least the last three years and possibly six years of their US income tax returns, depending upon the amount of any unreported income from these foreign accounts. A taxpayer initiates use of the OVDI program by contacting the Criminal Investigation division of the IRS, and details regarding that process may be found here.

Finally, a word of caution is in order. The IRS reserves the right to change the terms of the new OVDI program at any time, and any party planning to utilize this program should become thoroughly familiar with the current rules before proceeding.

Conclusion

Taxpayers who want to catch up on their late filings of FBARs again have multiple options with the renewal of the Offshore Voluntary Disclosure Program. Those who should have filed in the past should assess whether standard filing or use of the new OVDI program is appropriate.