Offshore voluntary disclosure initiative.

• Author: Chambers, Valrie

On February 8, the IRS announced another special voluntary disclosure initiative designed to bring U.S. persons hiding assets offshore back into the U.S. tax system (IR-2011-14). This is potentially good news for those taxpayers who did not know about the first two initiatives, but the penalties associated with the disclosure are higher and the terms slightly different. This new initiative, the 2011 Offshore Voluntary Disclosure Initiative (2011 OVDI), will be available only through August 31, 2011. This item discusses some of the history related to the IRS effort to bring U.S. persons into compliance.

U.S. persons (individuals, corporations, partnerships, limited liability companies, and trusts) are required to report the income earned from investments held in foreign financial accounts. Any persons who have a financial interest in or signatory authority over any financial account or accounts, if the aggregate value of the accounts at any time during the year exceeds $10,000, must file Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (FBAR) (rev. October 2008). The penalties for failure to comply with the reporting and filing requirements are steep; the failure to check the box "yes" for disclosing foreign accounts on an individual tax return, Schedule B, is a potential felony. Therefore, taking advantage of the IRS's compliance programs avoids possible prosecution.

In addition, with the IRS currently implementing the Foreign Account Tax Compliance Act (FATCA), which was enacted as part of the Hiring Incentives to Restore Employment (HIRE) Act, P.L. 111-147, in 2010, Congress has provided the IRS with more transparency and better tools to track down Americans with offshore assets. Beginning with the 2011 tax year (for years beginning after March 18, 2010), in addition to the FBAR reporting requirements, U.S. individuals holding specified foreign assets with an aggregate value of all assets exceeding $50,000 will be required to file Form 8938, Statement of Foreign Financial Assets, with their tax return.

The IRS initiated the first offshore voluntary compliance program in 2003. Called the Last Chance Compliance Initiative, it resulted in very few individuals entering the program because there was little incentive to disclose offshore investments. The second initiative, which started in March 2009, was spiced with an added incentive for individuals to come forward based upon the August 2009 agreement between the United States...