In October 2009, the IRS closed its first attempt to obtain voluntary disclosure by “U.S. persons” of their foreign accounts and entities (2009 program). In February 2011, the IRS announced a second initiative (2011 program). Compared to the 2009 program, the 2011 program increases the penalty on the highest aggregate value of the accounts from 20 percent to 25 percent (offshore penalty) and expands the covered period from six to eight years, now covering the years 2003 through 2010. Similarly, the 20 percent accuracy-related penalty is still in place for all eight years (2003-2010); thus the exposure is now for two additional years as opposed to the six-year period under the 2009 program. As with the 2009 program, the offshore penalty is in lieu of the penalty for failure to file a Report of Foreign Bank and Financial Accounts (FBAR penalty) and other offshore-related information return penalties described in the box below.

To participate in the program, taxpayers are required to file delinquent or amended returns for the entire period covering the offer. The deadline under the new program is Aug. 31, 2011. Additionally, taxpayers must include a payment for taxes, interest and penalties (including failure to file and pay penalties under Section 6651(a)(1) and (2), accuracy-related penalties, and the offshore penalty) by the Aug. 31 deadline. During the 2009 program, taxpayers were given the opportunity to enter into payment agreements rather than making the tax, interest and penalties payment upfront. Finally, after contact is made with the Philadelphia branch, all disclosure must be sent to the Austin, Texas, service center rather than the taxpayer’s geographic service center. The IRS expects that “complete submissions” will “close much faster,” as described in the FAQ. If the IRS has initiated a civil examination, regardless of whether it relates to undisclosed foreign accounts or undisclosed foreign entities, the taxpayer will not be eligible to come in under the 2011 program. Normally, no examination will be conducted with respect to a voluntary disclosure made under this initiative, although the IRS reserves the right to conduct an examination.

On June 2, 2011, the IRS announced, via an update to the FAQ, that a taxpayer may request a 90-day extension to the Aug. 31, 2011, deadline if he makes a good-faith effort to submit the information described above (and more fully listed in FAQ 25).

Taxpayers with smaller offshore accounts or assets that did not surpass $75,000 during the 2003-2010 time period will be eligible for a 12.5 percent penalty instead of the 25 percent offshore penalty. In limited situations, taxpayers may still qualify for a 5 percent offshore penalty.

Additionally, in the update to the FAQ on June 2, the IRS provided examples of when a taxpayer might consider opting out of the civil settlement under the 2011 program – unlike the 2009 program, the taxpayer must opt out of the 2011 program if the taxpayer is entitled to a lesser penalty. If the taxpayer opts out of the 2011 program, the taxpayer will be subject to a full-scope examination. The updated FAQ also includes examples of when opting out may prove detrimental to the taxpayer. The IRS has released an “Opt Out and Removal Guide for 2009 OVDP and 2011 OVDI” that discusses procedures that apply when a taxpayer requests to opt out of the civil settlement structure of the 2009 or 2011 programs or when the IRS determines that a taxpayer should be removed from the civil settlement structure.

Finally, in the updated FAQ, the IRS expands the circumstances in which the reduced 5 percent offshore penalty is available to include a taxpayer who resides in a foreign country, makes a good-faith effort to comply with the reporting and payment requirements in the country of residency, and has $10,000 or less of U.S. source income each year. Additionally, the 5 percent offshore penalty will apply only to financial assets of the nonresident taxpayer.

For those taxpayers who are considering the 2011 program and hold an interest in a passive foreign investment company (PFIC), the IRS is offering the taxpayer an alternative to the statutory PFIC computation. The IRS notes in the FAQ that a significant number of cases submitted under the 2009 program involve PFIC investments, and that due to a lack of historical information on the cost basis and holding period of many PFIC investments, it has been difficult for taxpayers to prepare statutory PFIC computations and for the IRS to verify them. As a result, resolution of voluntary disclosure cases has been unduly delayed. Under the terms of the alternative solution described in FAQ 10, the IRS will resolve PFIC issues on a basis that is consistent with the mark-to-market methodology authorized in Section 1296 but will not require complete reconstruction of historical data.

The IRS states in its FAQ that taxpayers who have chosen to make a “quiet disclosure” by filing amended returns reporting the additional unreported income rather than participating in the 2009 or 2011 programs continue to risk criminal prosecution for all applicable years. A “quiet disclosure” does not constitute a voluntary disclosure. Additionally, the Justice Department and the IRS have stepped up efforts to identify and prosecute those taxpayers with unreported offshore accounts and, based on comments made by IRS Commissioner Doug Shulman on May 18, 2011, the IRS expects to continue to pursue such taxpayers based on numerous leads and discussions with facilitators who have assisted taxpayers in hiding assets offshore. Taxpayers who have failed to disclose offshore accounts and do not participate in the 2011 program will be liable for civil and criminal penalties. The potential civil penalties are more fully described below.

Depending on the particular facts and circumstances, the following could apply:	Amount of penalty (a violation is a failure to file a form for each year required).	Applicable if taxpayer participates in 2011 program?
Failure to File:
Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts	Greater of $100,000 or 50 percent of the total balance of the foreign account ($10,000 penalty for nonwillful violations) per violation	No
Form 3520, Annual Return to Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts	35 percent of the gross reportable amount, except for returns reporting gifts, where the penalty is 5 percent of the gift per month, up to a maximum penalty of 25 percent of the gift per violation(or incomplete return)	No
Form 3520-A, Information Return of Foreign Trust With a U.S. Owner	5 percent of the gross value of trust assets determined to be owned by the United States person per violation (or incomplete return)	No
Form 5471, Information Return of U.S. Persons With Respect to Certain Foreign Corporations	$10,000 per violation, with an additional $10,000 added for each month the failure continues, beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50,000 per return	No
Form 5472, Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business	$10,000 per violation (or failure to keep certain records regarding a reportable transaction), with an additional $10,000 added for each month the failure continues, beginning 90 days after the taxpayer is notified of the delinquency	No
Form 926, Return by a U.S. Transferor of Property to a Foreign Corporation	10 percent of the value of the property transferred per violation, up to a maximum of $100,000 per return, with no limit if the failure to report the transfer was intentional	No
Form 8865, Return of U.S. Persons With Respect to Certain Foreign Partnerships	$10,000 per violation, with an additional $10,000 added for each month the failure continues, beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50,000 per return, and 10 percent of the value of any transferred property that is not reported, subject to a $100,000 limit	No
An income tax return imposed under IRC § 6651(a)(1)	5 percent of the balance due on a return, plus an additional 5 percent for each month or fraction thereof during which the failure continues, subject to a maximum penalty of 25 percent	Yes
Miscellaneous:
Fraud penalties imposed under IRC §§ 6651(f) or 6663	75 percent of the unpaid tax (subject to different calculations)	No
Failure to pay the amount of tax shown on the return under IRC § 6651(a)(2)	0.5 percent of the amount of tax shown on the return, plus an additional 0.5 percent for each additional month or fraction thereof that the amount remains unpaid, not exceeding 25 percent.	Yes
An accuracy-related penalty on underpayments imposed under IRC § 6662	20 percent or 40 percent of the underpayment (depending upon which component of the accuracy-related penalty is applicable)	Yes at 20%

The offshore penalty is in lieu of the penalties that are not applicable to the taxpayer if he participates in the 2011 program.


For a discussion of the terms of the 2011 program, see
http://www.irs.gov/newsroom/article/0,,id=234900,00.html.

For the 2011 Offshore Voluntary Disclosure Initiative Frequently Asked Questions and Answers (including the 6/2/11 updates), see http://www.irs.gov/businesses/international/article/
0,,id=235699,00.html.

For the Opt Out and Removal Guide for the 2009 OVDP and 2011 OVDI, see http://www.irs.treas.gov/pub/newsroom/
2011_ovdi_opt_out_and_removal_guide_and_memo_
june_1_2011.pdf.

For our discussion of the June 30, 2011, FBAR deadline, see
http://www.stradley.com/newsletters.php?action=view&id=649.

The posting of information on this Web site, or the receipt of information by viewers of this Web site, is not intended to – and does not – create an attorney-client relationship. This Web site is not intended to provide legal advice, and visitors to this Web site should refrain from acting on information posted here without seeking specific legal advice from individually qualified counsel.