Amnesty for offshore tax evaders.

• Author: Ely, Mark H.

Effective Jan. 14, 2003, the IRS issued Rev. Proc. 2003-11, the Offshore Voluntary Compliance Initiative. This one-time amnesty program generally applies to taxpayers who underreported their 1999, 2000, 2001 and/or 2002 taxable income by using payment cards (e.g., debit, credit and charge cards) issued by foreign banks and offshore financial arrangements with foreign entities (e.g., foreign trusts, corporations, partnerships and financial institutions). The Initiative may be available for tax years ending before 1999 under certain circumstances.

According to the Initiative, eligible taxpayers who apply by April 15, 2003 can possibly avoid criminal prosecution and some civil penalties; however, they must still pay back taxes, interest and, perhaps in appropriate circumstances, the delinquency penalty under Sec. 6651 and the accuracy-related penalty under Sec. 6662. In IR 2003-5, the Service indicated "[e]ligible taxpayers who come forward will also avoid criminal prosecution based upon application of the revised voluntary disclosure practice." Further, filing for amnesty will not preclude the Service from auditing a taxpayer's related return and/or proposing changes for items not resolved under the Initiative.

The Initiative permits eligible taxpayers to file or amend their returns and pay back taxes. The amount and type of penalties will be based on several factors, including the number of years involved, the tax underpayment amount, whether a return was inaccurate and whether a return was filed at all.

Possible Penalties Avoided

For eligible taxpayers who voluntarily come forward, the IRS will refrain

from assessing:

* The Sec. 6651 (f) fraudulent failure-to-file penalty;

* The Sec. 6663 civil fraud penalty; and

* Information return civil penalties for failure to comply with Secs. 6035, 6038, 6038A, 6038B, 6038C, 6039F, 6046, 6046A and 6048.

The latter penalties result when a taxpayer fails to file Forms 5471, Information Return of U.S. Persons with Respect to Certain Foreign Corporations; 5472, Information Return of a 25% Foreign-Owned U.S. Corporation or Foreign Corporation Engaged in a U.S. Trade or Business; 926, Return by a U.S. Transferor of Property to a Foreign Corporation; 3520, Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts; 3520-A, Annual Information Return of Foreign Trust with a U.S. Owner; and/or 8865, Return of U.S. Persons with Respect to Certain Foreign Partnerships.

In addition, Treasury's Financial Crimes Enforcement Network will refrain from imposing civil penalties for failure to comply with 31 USC Section 5314 and 31 CFR Part 103.24. These rules...