Delinquent U.S. foreign information returns: is filing under the 2011 OVDI appropriate?

• Author: Bakale, Anthony S.
• Position: Offshore Voluntary Disclosure Initiative

In early February, IRS Commissioner Douglas Shulman announced an opportunity for taxpayers to avoid a substantial portion of the penalties that would otherwise be due on previously unreported offshore accounts, entities, and income. Taxpayers who successfully participate in the 2011 Offshore Voluntary Disclosure Initiative (OVDI) will benefit from significantly reduced penalties and avoidance of criminal prosecution. The OVDI generally runs until August 31, 2011; however, the IRS has provided that taxpayers who make a good-faith attempt to fully comply by August 31 but are unable to submit a complete package can request a 90-day deadline extension (FAQ No. 25.1).

Immediately atter announcing the OVDI, the IRS released guidance on specific details in the form of frequently asked questions (FAQs) (available at www.irs.gov/businesses/international/article/0id=235699,00.html). Within those questions and answers, the IRS has presented a significant opportunity for taxpayers who properly reported all their income to obtain automatic relief, outside the OVDI, for failure to file certain U.S. foreign information returns. To qualify, taxpayers must generally file these outstanding returns by August 31, 2011.

FAQs Nos. 17 and 18 specifically state that U.S. persons who reported all their taxable income but only recently learned of their filing failures with respect to Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (FBAR), or other U.S. foreign information returns (e.g., Forms 5471, Information Return of U.S. Persons with Respect to Certain Foreign Corporations, and 3520, Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts) can obtain penalty relief by filing these delinquent returns under the parameters of the FAQs, but outside the OVDI.

FAQ No. 17

FAQ No. 17 establishes an automatic waiver of the reporting penalties for failure to file an FBAR when the taxpayer has properly reported all taxable income but only recently learned that it was subject to the FBAR requirement. FAQ No. 17 makes it clear that to qualify for this penalty relief a taxpayer should not file under the 2011 OVDI but instead should file any delinquent FBARs in the normal manner by August 31, 2011. The taxpayer should file these delinquent reports with Treasury's Detroit processing center, along with an explanation of why the reports are late.

FAQ No. 18

FAQ No. 18 establishes an automatic waiver of penalties for failure...