IRS offers new options for taxpayers who failed to file international information returns.

• Author: Boyle, Brandon

In June, the IRS made considerable modifications to the Offshore Voluntary Disclosure Program (OVDP), which for years has been used by taxpayers to avoid criminal prosecution by disclosing foreign financial accounts, getting current on taxes owed on income generated by those accounts, and paying a penalty.

In addition to changes to the OVDP, the IRS provided updated guidance addressing the appropriate procedure for taxpayers who have failed to file required international information returns (such as Forms 5471, Information Return of U.S. Persons With Respect to Certain Foreign Corporations, and 5472, Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business) or who have failed to file required Fin-CEN Forms 114, Report of Foreign Bank and Financial Accounts (FBARs) (previously Treasury Form TD F 90-22.1).The ways a taxpayer can deal with the failure to file these forms are outlined in "Options Available for U.S. Taxpayers With Undisclosed Foreign Financial Assets" (available at tinyurl.com/pec3cfp).

Remedial procedures contained in the options may apply to taxpayers in the following situations:

* Failure to report gross income from a foreign financial asset and pay tax as required by U.S. law;

* Failure to timely file FBARs; and * Failure to timely file international information returns (e.g., Forms 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, 5471; 5472; 8938, Statement of Specified Foreign Financial Assets', 926, Return by a U.S. Transferor of Property to a Foreign Corporation', and 8621, Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund).

The four options available contain significant distinctions that must be considered by taxpayers and tax advisers. Below is an overview of each option.

Option 1: Offshore Voluntary Disclosure Program (OVDP)

The OVDP is designed for taxpayers with exposure to potential criminal liability and/or substantial civil penalties due to a willful failure to report foreign financial assets and pay all taxes due on those assets. It provides taxpayers with such exposure (1) protection from criminal liability; and (2) terms for resolving their civil tax and penalty obligations.

The decision for a taxpayer to enter into the OVDP is not one to be taken lightly. Indeed, many...