A Quick Look At The 2nd Voluntary Disclosure Initiative

fair way to resolve their tax problems once and for all. And it gives people a chance to The IRS press release regarding the 2011 voluntary disclosure initiative is in block quotes and my commentary intermingled in bold.


***Update 2017: Learn about the current disclosure programs here.***


WASHINGTON — The Internal Revenue Service announced today a special voluntary disclosure initiative designed to bring offshore money back into the U.S. tax system and help people with undisclosed income from hidden offshore accounts get current with their taxes. The new voluntary disclosure initiative will be available through Aug. 31, 2011.


All Amended 1040X's and amended FBARs must be submitted by August 31st. This is change in procedure from the last voluntary disclosure initiative, when we filed our disclosures first, then months later amended 1040X and FBARs. This round is much more time -sensitive.


“As we continue to amass more information and pursue more people internationally, the risk to individuals hiding assets offshore is increasing,” said IRS Commissioner Doug Shulman. “This new effort gives those hiding money in foreign accounts a tough, come in before we find them.”


"Fair" seems to be a judgment call to me. I am doubtful that this voluntary disclosure initiative is fair. Two reasons; First there is no de minimus (small case) exception. Second, for many taxpayers, the cost to come clean can easily outstrip the present value of the account. And, if the offshore accounts represent a substantial portion of the taxpayer's total wealth, could even outstrip their entire net worth.


The IRS' decision to open a second special voluntary disclosure initiative follows continuing interest from taxpayers with foreign accounts. The first special voluntary disclosure initiative program closed with 15,000 voluntary disclosures on Oct. 15, 2009. Since that time, more than 3,000 taxpayers have come forward to the IRS with bank accounts from around the world. These taxpayers will also be eligible to take advantage of the special provisions of the new voluntary disclosure initiative.


The IRS learned A LOT from these previous disclosures…the countries, the banks and the individuals who appear repeatedly are going to get extra attention with the 2011 voluntary disclosure initiative.


“As I’ve said all along, the goal is to get people back into the U.S. tax system,” Shulman said. “Combating international tax evasion is a top priority for the IRS. We have additional cases and banks under review. The situation will just get worse in the months ahead for those hiding assets and income offshore. This new disclosure initiative is the last, best chance for people to get back into the system.”


The IRS may be squeezing so hard, that people expatriate and leave the US tax system…permanently.


The new voluntary disclosure initiative announced today – called the 2011 Offshore Voluntary Disclosure Initiative (OVDI) — includes several changes from the 2009 Offshore Voluntary Disclosure Program (OVDP). The overall penalty structure for 2011 is higher, meaning that people who did not come in through the 2009 voluntary disclosure initiative program will not be rewarded for waiting. However, the 2011 voluntary disclosure initiative does add new features.


Think of "features" as punitive, painful penalties that will depress you. But this depressing reality must be balanced with the other depressing reality that federal time is awful time. 


For the 2011 voluntary disclosure initiative, there is a new penalty framework that requires individuals to pay a penalty of 25 percent of the amount in the foreign bank accounts in the year with the highest aggregate account balance covering the 2003 to 2010 time period. Some taxpayers will be eligible for 5 or 12.5 percent penalties. Participants in the voluntary disclosure initiative also must pay back-taxes and interest for up to eight years as well as paying accuracy-related and/or delinquency penalties.


Lower penalties are really for few cases where taxpayer inherited account and never took much of an active participation in it, and never took all that much money from it.


Taxpayers participating in the new voluntary disclosure initiative must file all original and amended tax returns and include payment for taxes, interest and accuracy-related penalties by the Aug. 31 deadline.


That means, don't decide on August 30th that you want to participate. We have established a cut-off date of taking any new clients who wish to take this deal of June 1st, 2011.


The IRS is also making other modifications to the 2011 voluntary disclosure initiative.


This means the IRS will be making changes that may benefit or harm you….after you made your decision regarding the 2011 voluntary disclosure initiative.


Participants face a 25 percent penalty, but taxpayers in limited situations can qualify for a 5 percent penalty.


Again, an exception is not likely. This is not the only penalty. This is only the FBAR penalty. Which is 25% on highest account value. So, if your highest value was $10,000,000 in 2005 and the account is now worth only $5,000,000, you have a $2,500,000 FBAR penalty alone.


The IRS also created a new penalty category of 12.5 percent for treating smaller offshore accounts. People whose offshore accounts or assets did not surpass $75,000 in any calendar year covered by the 2011 voluntary disclosure initiative will qualify for this lower rate.


And you only withdrew a small amount of money.


The 2011 voluntary disclosure initiative offers clear benefits to encourage taxpayers to come in now rather than risk IRS detection. Taxpayers hiding assets offshore who do not come forward will face far higher penalty scenarios as well as the possibility of criminal prosecution.


We encountered resistance to the last deal which was more favorable, and this deal is not nearly as good. I expect more resistance and inquiries into other legitimate ways to lower criminal exposure and tax bills. The worst thing is to do nothing. Or freak out and hastily attempt to flee the country. Any country that does not have an extradition treaty for tax evasion is probably a country you really don't want to live in.


“This is a fair offer for people with offshore accounts who want to get right with the nation’s taxpayers,” Shulman said. “This 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.”


There's that word "fair" again. That is a judgment call.


The IRS is handling processing of the voluntary disclosures in centralized units to more efficiently process the applications.


In round one, we worked with the IRS and suggested ways to streamline the process. We have worked with some incredibly bright, hardworking, and professional revenue agents. We hope we get to work with them again.


The IRS has launched a new section on www.irs.gov that includes the full terms and conditions on the 2011 Offshore Voluntary Disclosure Initiative, including an extensive set of questions and answers to help taxpayers and tax professionals. The web site also includes details on how people can make a voluntary disclosure.


Be sure you talk to a tax attorney who has experience with handling voluntary disclosures. Don't take advice from a website, there are far too many issues that need to be considered.


In the first voluntary disclosure initiative program in 2009, taxpayers faced up to a 20 percent penalty covering up to a six-year period. Taxpayers came forward with about 15,000 voluntary disclosures in that effort covering banks in more than 60 countries.


The penalties are much higher now . A 25% FBAR penalty, plus an under reporting penalty, plus 8 years of unreported income, not 6. And interest has been accruing the entire time.


Shulman said IRS efforts in the international arena will only increase as time goes on. “Tax secrecy continues to erode,” Shulman said. “We are not letting up on international tax issues, and more is in the works. For those hiding cash or assets offshore, the time to come in is now. The risk of being caught will only increase.”


This is so true. The noose is tightening — the IRS is getting more and more powerful every day with additional authorizations from Congress. Illegitimate tax evasion schemes are dead. But, I think an unforeseen consequence will be that the cost of compliance is getting so high that every American is at a strategic disadvantage when investing abroad. My guess is that the new enforcement laws will force many to consider whether or not they wish to renounce their citizenship and avoid the IRS entirely.


If you need assistance understaning which, if any, disclosure program you should get into, contact us. We can help. Call us at 888-727-8796 or email info@irsmedic.com.