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TAX MATTERS

Carrot and Stick Reprised for Foreign Accounts

 

MAY 2011

The IRS on Feb. 8 opened a second reduced-penalty voluntary compliance initiative for taxpayers’ undisclosed offshore assets. The program is designed to bring money held in foreign accounts back into the U.S. tax system and to help taxpayers with income from offshore accounts to comply with federal tax law. Under the program, taxpayers that disclose previously undisclosed foreign accounts and comply with the terms of the program can avoid otherwise applicable civil penalties and criminal prosecution.

 

A little more than two weeks later, the Justice Department and IRS paired that “carrot” with a “stick” as they announced federal indictments against four Swiss bankers and arrested a fifth, all charged with conspiring to help U.S. taxpayers evade taxes on billions of dollars in Swiss accounts.

 

The 2011 Offshore Voluntary Disclosure Initiative will run through Aug. 31, 2011. It is modeled on the IRS’ 2009 offshore voluntary disclosure program, which resulted in voluntary disclosure by some 15,000 taxpayers. The IRS reported that another 3,000 have come forward since the end of that program.

 

The 2011 program requires participants to report and pay back taxes and interest for up to eight previous years instead of the six years required in the 2009 program. Under the 2011 program, taxpayers will generally pay a penalty of 25% of the highest aggregate account balance in their foreign bank accounts at any time between 2003 and 2010. This penalty is in lieu of all other penalties that might apply, except for the failure-to-file, failure-to-pay, accuracy-related and delinquency penalties.

 

Individuals with offshore accounts or assets of less than $75,000 in any calendar year covered by the 2011 initiative will qualify for a 12.5% penalty rate. Some taxpayers will qualify for a 5% rate, but only in narrow circumstances, such as foreign residents who are unaware that they are U.S. citizens.

 

Participants in the program must file all original and amended tax returns for the affected years and include payment for taxes, interest and accuracy-related penalties by the Aug. 31 deadline.

 

The IRS has on its website (tinyurl.com/5sflxql) provided answers to more than 50 questions about the program and civil and criminal penalties that may apply to taxpayers that do not come forward voluntarily.

 

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