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Second chance for voluntary disclosure

Buoyed by the success of their 2010 Voluntary Disclosure Initiative the Internal Revenue Service announced on February 8, 2011 a Special Voluntary Disclosure Initiative designed to bring offshore funds back into the United States tax net and to assist individuals with undisclosed income from offshore accounts become current with their taxes. The new programme is available until August 31, 2011.

Initial Voluntary Disclosure Programme

As of October 15, 2009 over 15,000 individuals entered into the voluntary disclosure programme. Since then another 3,000 individuals have come forward. Individuals who did not come forward and who have been discovered by the Internal Revenue Service had criminal charges lodged against them and some have been sentenced to jail as well as being subject to significant tax, penalties and interest. The 2010 programme required the filing of returns for the prior six years as well as imposing a 20 percent penalty based on the highest amount in the offshore account during that six-year period.

2011 Offshore Voluntary Disclosure Initiative (OVDI)Individuals who did not volunteer for the 2010 programme will face harsher penalties. Individual will now have to file original and/or amended tax returns for eight years, 2003 to 2010 and include payment for taxes, interest and accuracy related penalties by August 31, 2011. The 2011 initiative imposes a 25 percent penalty based on the highest amount in the offshore account during the 2003 to 2010 period. So if an individual had $4 million in an offshore account at any one time during the eight-year period in addition to paying taxes, interest and accuracy related penalties that likely would amount to $1 million the individual would owe another $1 million as a result of the 25 percent penalty.

Some taxpayers may be eligible for a five percent to 12.5 percent penalty depending on their particular circumstances. The five percent penalty will apply in limited circumstances. The 12.5 percent penalty will apply to individuals whose offshore accounts and assets were less than $75,000 in any year from 2003 to 2010.

Why Volunteer?As noted above, the Internal Revenue Service is not just looking for individuals with millions of dollars in offshore accounts. The penalty increases from 12.5 percent to 25 percent at $75,000. Volunteering will be painful, but you can likely avoid criminal prosecution. And if you are caught, the penalties imposed will be significantly higher than 25 percent.

IRS Commissioner Doug Sluman was quoted: “The new effort gives those hiding money in foreign accounts a tough, fair way to resolve their tax problems once and for all. The initiative offers them the chance to get certainty about how their case will be handled. Just as importantly, those who truly come in voluntarily can avoid criminal prosecution as well. And it gives people a chance to come in before we find them.”

It is not a secret that there are individuals, most of modest means, who do not file US tax returns for one reason or another and who balk at just the cost of preparing the prior year tax returns. In retrospect, the tax preparation fee will pale in light of the IRS assessing tax, penalties and interest of 50 percent to 75 percent of your net assets.

Report of Foreign Bank and Financial Accounts Form TD F 90-22.1The Treasury Department Financial Crimes Enforcement Network issued final regulations last month clarifying who is required to file Form TD F 90-22.1. Under Federal Banking law any US person with a financial interest in or signature authority over, any financial account in a foreign country must file Form TD F 90-22.1 if the value of the account at any time during the calendar year exceeds $10,000.

The final regulations define “signature authority” to include the authority of an individual to control the disposition of the funds in the account by direct communication to the person with whom the account is maintained. This includes foreign comingled funds as well as mutual funds. Financial Crimes Enforcement Network is responsible for issuing regulations and the Internal Revenue Service is responsible for enforcing the regulations.

Pursuant to the requirements relating to practice before the Internal Revenue Service, any tax advice in this communication is not intended to be used, and cannot be used, for the purpose of (i) avoiding penalties imposed under the United States Internal Revenue Code, or (ii) promoting, marketing or recommending to another person any tax related manner.

The tax advice given by this column is, by necessity, general in nature. You should, of course, check with your own U.S. tax consultant as to how specific transactions affect you since tax advice varies with individual circumstances.

James Paul Sabo, CPA, is the President of ETS Ltd., PO Box HM 1574, Hamilton HM GX, Bermuda. Questions should be sent to: jsabo[AT]

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Published March 22, 2011 at 2:00 am (Updated March 22, 2011 at 10:19 am)

Second chance for voluntary disclosure

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