Posted by: euser
June 23, 2009
Topic: Legal News

The Offshore Voluntary Disclosure Program 2009

As many of you may already be aware the IRS has instituted a 6 month special voluntary disclosure program for individuals who have offshore / foreign accounts, or entities, including trusts and corporations. The IRS has recently issued "frequently asked questions" discussing how they will deal with various issues in this disclosure. As noted above, there is a very short window for participating in this program. Anyone having further questions concerning this program should contact me at the website intake form or by calling me at (407) 696-1040.

(the below is copied from the IRS.gov website{ http://www.irs.gov/pub/irs-news/faqs.pdf})

Frequently Asked Questions May 6, 2009

1. Why did the IRS issue internal guidance regarding offshore activities now?

The IRS has had a voluntary disclosure practice in its Criminal Manual for many years. Once IRS Criminal Investigation has determined preliminary acceptance into the voluntary disclosure program, the case is referred to the civil side of IRS for examination and resolution of taxes and penalties. Recent IRS enforcementefforts in the offshore area have led to an increased number of voluntary disclosures. Additional taxpayers are considering making voluntary disclosures but are reportedly reluctant to come forward because of uncertainty about the amount of their liability for potentially onerous civil penalties. In order to resolve these cases in an organized, coordinated manner and to make exposure to civil penalties more predictable, the IRS has decided to centralize the civil processing of offshore voluntary disclosures and to offer a uniform penalty structure for taxpayers who voluntarily come forward. These steps were taken to ensure that taxpayers are treated consistently and predictably.

2. What is the objective of these steps?

The objective is to bring taxpayers that have used undisclosed foreign accounts

and undisclosed foreign entities to avoid or evade tax into compliance with

United States tax laws. Additionally, the information gathered from taxpayers

making voluntary disclosures under this practice will be used to further the IRS's

understanding of how foreign accounts and foreign entities are promoted to

United States taxpayers as ways to avoid or evade tax. Data gathered will be

used in developing additional strategies to inhibit promoters and facilitators from

soliciting new clients.

3. Why should I make a voluntary disclosure?

Taxpayers with undisclosed foreign accounts or entities should make a voluntary

disclosure because it enables them to become compliant, avoid substantial civil

penalties and generally eliminate the risk of criminal prosecution. Making a

voluntary disclosure also provides the opportunity to calculate, with a reasonable

degree of certainty, the total cost of resolving all offshore tax issues. Taxpayers

who do not submit a voluntary disclosure run the risk of detection by the IRS and

the imposition of substantial penalties, including the fraud penalty and foreign

information return penalties, and an increased risk of criminal prosecution.

4. What is the IRS's Voluntary Disclosure Practice?

The Voluntary Disclosure Practice is a longstanding practice of IRS Criminal

Investigation of taking timely, accurate, and complete voluntary disclosures into

account in deciding whether to recommend to the Department of Justice that a

taxpayer be criminally prosecuted. It enables noncompliant taxpayers to resolve

their tax liabilities and minimize their chances of criminal prosecution. When a

taxpayer truthfully, timely, and completely complies with all provisions of the

voluntary disclosure practice, the IRS will not recommend criminal prosecution to

the Department of Justice.

5. How do I make a voluntary disclosure and where should I submit my

voluntary disclosure?

A voluntary disclosure is made by following the procedures described in I.R.M.

9.5.11.9. Tax professionals or individuals who want to initiate a voluntary

disclosure, should call their local CI office. For a list of CI offices, visit:

http://www.irs.gov/compliance/enforcement/article/0,,id=205909,00.html

Taxpayers with questions may call the IRS Voluntary Disclosure Hotline at

(215)516-4777, visit www.irs.gov, or contact their nearest CI office.

6. What form should my voluntary disclosure take?

You should send a letter to the nearest Special Agent in Charge, IRS Criminal

Investigation, stating that you wish to make a voluntary disclosure. Ideally, the

letter should contain all your identifying information, including name, address,

Social Security Number or other Taxpayer Identification Number, passport

number and date of birth, and should also include an explanation of any

previously unreported or underreported income or incorrectly claimed deductions

or credits related to undisclosed foreign accounts or undisclosed foreign entities,

including the reason(s) for the error or omission. It should also include a power

of attorney (Form 2848), if you are represented, and daytime contact information

for you or your representative. If you have already completed the amended or

delinquent returns, those should be submitted with the letter, but it is not

necessary to include them with the initial submission if you are unable to do so.

At a minimum, however, the initial submission must include the taxpayer's name

and identifying information described above. IRS Criminal Investigation will

follow up on the facts and circumstances to assess the timeliness, completeness,

and truthfulness of the voluntary disclosure.

7. I'm currently under examination. Can I come in under voluntary

disclosure?

No. If the IRS has initiated a civil examination, regardless of whether it relates to

undisclosed foreign accounts or undisclosed foreign entities, the taxpayer will not

be eligible to come in under the IRS's Voluntary Disclosure Practice.

8. I have an offshore merchant account upon which I have not reported all

of the income. Can I come in under the IRS's voluntary disclosure

practice?

Yes. Taxpayers with unreported income from an offshore merchant account

can makea voluntary disclosure.

9. I have properly reported all my taxable income but I only recently

learned that I should have been filing FBARs in prior years to report my

personal foreign bank account or to report the fact that I have signature

authority over bank accounts owned by my employer. May I come

forward under the voluntary disclosure practice to correct this?

The purpose for the voluntary disclosure practice is to provide a way for

taxpayers who did not report taxable income in the past to voluntarily come

forward and resolve their tax matters. Thus, If you reported and paid tax on all

taxable income but did not file FBARs, do not use the voluntary disclosure

process.

For taxpayers who reported and paid tax on all their taxable income for prior

years but did not file FBARs, you should file the delinquent FBAR reports

according to the instructions and attach a statement explaining why the reports

are filed late. Send copies of the delinquent FBARs, together with copies of tax

returns for all relevant years, by September 23, 2009, to the Philadelphia

Offshore Identification Unit at:

Internal Revenue Service

11501 Roosevelt Blvd.

South Bldg., Room 2002

Philadelphia, PA 19154

Attn: Charlie Judge, Offshore Unit, DP S-611

The IRS will not impose a penalty for the failure to file the FBARs.

10. What if the taxpayer has already filed amended returns reporting the

additional unreported income, without making a voluntary disclosure

(i.e., quiet disclosure)?

The IRS is aware that some taxpayers have attempted so-called "quiet"

disclosures by filing amended returns and paying any related tax and interest for

previously unreported offshore income without otherwise notifying the IRS.

Taxpayers who have already made "quiet" disclosures may take advantage of

the penalty framework applicable to voluntary disclosure requests regarding

unreported offshore accounts and entities. Those taxpayers must send

previously submitted documents, including copies of amended returns, to their

local CI office by September 23, 2009. (See FAQ 5).

Taxpayers are strongly encouraged to come forward under the Voluntary

Disclosure Practice to make timely, accurate, and complete disclosures. Those

taxpayers making "quiet" disclosures should be aware of the risk of being

examined and potentially criminally prosecuted for all applicable years.

The IRS has identified, and will continue to identify, amended tax returns

reporting increases in income. The IRS will be closely reviewing these returns to

determine whether enforcement action is appropriate.

11. Is a taxpayer who sought relief under the IRS's Voluntary Disclosure

Practice before this internal guidance was issued, eligible for the terms

described in this internal guidance?

Yes. If a taxpayer sought relief under the IRS's Voluntary Disclosure Practice

before this internal guidance was issued he or she may be eligible, as long as the

voluntary disclosure has not yet resulted in an assessment.

12. How does the penalty framework work? Can you give us an

example?

Assume the taxpayer has the following amounts in a foreign account over a

period of six years. Although the amount on deposit may have been in the

account for many years, it is assumed for purposes of the example that it is not

unreported income in 2003.

(NOTE: This example does not provide for compounded interest, and assumes

the taxpayer is in the 35-percent tax bracket, files a return but does not include

the foreign account or the interest income on the return, and the maximum

applicable penalties are imposed.)

If the taxpayer comes forward and has their voluntary disclosure accepted

by the IRS, they face this potential scenario:

They would pay $386,000 plus interest. This includes:

- Tax of $105,000 (six years at $17,500) plus interest,

- An accuracy-related penalty of $21,000 (i.e., $105,000 x 20%), and

- An additional penalty, in lieu of the FBAR and other potential penalties that

may apply, of $260,000 (i.e., $1,300,000 x 20%).

Year Amount on Deposit Interest Income Account Balance

2003 1,000,000 $ 50,000 $ 1,050,000 $

2004 50,000 $ 1,100,000 $

2005 50,000 $ 1,150,000 $

2006 50,000 $ 1,200,000 $

2007 50,000 $ 1,250,000 $

2008 50,000 $ 1,300,000 $

If the taxpayer didn't come forward and the IRS discovered their offshore

activities, they face up to $2,306,000 in tax, accuracy-related penalty, and

FBAR penalty. The taxpayer would also be liable for interest and possibly

additional penalties, and an examination could lead to criminal

prosecution.

The civil liabilities potentially include:

- The tax and accuracy-related penalty, plus interest, as described above,

- FBAR penalties totaling up to $2,175,000 for willful failures to file complete

and correct FBARs (2003- $100,000, 2004 - $100,000, 2005 - $100,000,

2006 - $600,000, 2007 - $625,000 and 2008 - $650,000),

- The potential of having the fraud penalty (75 percent) apply, and

- The potential of substantial additional information return penalties if the

foreign account or assets is held through a foreign entity such as a trust or

corporation and required information returns were not filed.

Note that if the foreign activity started more than six years ago, the Service may

also have the right to examine additional years.

13. What years are included in the 6-year period?

A taxpayer is expected to file correct delinquent or amended tax returns for tax

year 2008 back to 2003.

14. What are some of the criminal charges I might face if I don't come in

under voluntary disclosure and the IRS finds me?

Possible criminal charges related to tax returns include tax evasion (26 U.S.C.

§ 7201), filing a false return (26 U.S.C. § 7206(1)) and failure to file an income

tax return (26 U.S.C. § 7203). The failure to file an FBAR and the filing of a false

FBAR are both violations that are subject to criminal penalties under 31 U.S.C.

§ 5322.

A person convicted of tax evasion is subject to a prison term of up to five years

and a fine of up to $250,000. Filing a false return subjects a person to a prison

term of up to three years and a fine of up to $250,000. A person who fails to file

a tax return is subject to a prison term of up to one year and a fine of up to

$100,000. Failing to file an FBAR subjects a person to a prison term of up to ten

years and criminal penalties of up to $500,000.

15. What are some of the civil penalties that might apply if I don't come

in under voluntary disclosure and the IRS finds me? How do they

work?

The following is a summary of potential reporting requirements and civil penalties

that could apply to a taxpayer, depending on his or her particular facts and

circumstances.

- A penalty for failing to file the Form TD F 90-22.1 (Report of Foreign Bank

and Financial Accounts, commonly known as an "FBAR"). United States

citizens, residents and certain other persons must annually report their

direct or indirect financial interest in, or signature authority (or other

authority that is comparable to signature authority) over, a financial account

that is maintained with a financial institution located in a foreign country if,

for any calendar year, the aggregate value of all foreign accounts exceeded

$10,000 at any time during the year. Generally, the civil penalty for willfully

failing to file an FBAR can be as high as the greater of $100,000 or 50

percent of the total balance of the foreign account. See 31 U.S.C.

§ 5321(a)(5). Nonwillful violations are subject to a civil penalty of not more

than $10,000.

- A penalty for failing to file Form 3520, Annual Return to Report

Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts.

Taxpayers must also report various transactions involving foreign trusts,

including creation of a foreign trust by a United States person, transfers of

property from a United States person to a foreign trust and receipt of

distributions from foreign trusts under section 6048. This return also reports

the receipt of gifts from foreign entities under section 6039F. The penalty

for failing to file each one of these information returns, or for filing an

incomplete return, is 35 percent of the gross reportable amount, except for

returns reporting gifts, where the penalty is five percent of the gift per

month, up to a maximum penalty of 25 percent of the gift.

- A penalty for failing to file Form 3520-A, Information Return of Foreign Trust

With a U.S. Owner. Taxpayers must also report ownership interests in

foreign trusts, by United States persons with various interests in and

powers over those trusts under section 6048(b). The penalty for failing to

file each one of these information returns or for filing an incomplete return,

is five percent of the gross value of trust assets determined to be owned by

the United States person.

- A penalty for failing to file Form 5471, Information Return of U.S. Person

with Respect to Certain Foreign Corporations. Certain United States

persons who are officers, directors or shareholders in certain foreign

corporations (including International Business Corporations) are required to

report information under sections 6035, 6038 and 6046. The penalty for

failing to file each one of these information returns is $10,000, with an

additional $10,000 added for each month the failure continues beginning 90

days after the taxpayer is notified of the delinquency, up to a maximum of

$50,000 per return.

- A penalty for failing to file Form 5472, Information Return of a 25% Foreign-

Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade

or Business. Taxpayers may be required to report transactions between a

25 percent foreign-owned domestic corporation or a foreign corporation

engaged in a trade or business in the United States and a related party as

required by sections 6038A and 6038C. The penalty for failing to file each

one of these information returns, or to keep certain records regarding

reportable transactions, is $10,000, with an additional $10,000 added for

each month the failure continues beginning 90 days after the taxpayer is

notified of the delinquency, up to a maximum of $50,000 per return.

- A penalty for failing to file Form 926, Return by a U.S. Transferor of

Property to a Foreign Corporation. Taxpayers are required to report

transfers of property to foreign corporations and other information under

section 6038B. The penalty for failing to file each one of these information

returns is ten percent of the value of the property transferred, up to a

maximum of $100,000 per return, with no limit if the failure to report the

transfer was intentional.

- A penalty for failing to file Form 8865, Return of U.S. Persons With Respect

to Certain Foreign Partnerships. United States persons with certain

interests in foreign partnerships use this form to report interests in and

transactions of the foreign partnerships, transfers of property to the foreign

partnerships, and acquisitions, dispositions and changes in foreign

partnership interests under sections 6038, 6038B, and 6046A. Penalties

include $10,000 for failure to file each return, with an additional $10,000

added for each month the failure continues beginning 90 days after the

taxpayer is notified of the delinquency, up to a maximum of $50,000 per

return, and ten percent of the value of any transferred property that is not

reported, subject to a $100,000 limit.

- Fraud penalties imposed under sections 6651(f) or 6663. Where an

underpayment of tax, or a failure to file a tax return, is due to fraud, the

taxpayer is liable for penalties that, although calculated differently,

essentially amount to 75 percent of the unpaid tax.

- A penalty for failing to file a tax return imposed under section 6651(a)(1).

Generally, taxpayers are required to file income tax returns. If a taxpayer

fails to do so, a penalty of 5 percent of the balance due, plus an additional 5

percent for each month or fraction thereof during which the failure continues

may be imposed. The penalty shall not exceed 25 percent.

- A penalty for failing to pay the amount of tax shown on the return under

section 6651(a)(2). If a taxpayer fails to pay the amount of tax shown on

the return, he or she may be liable for a penalty of .5 percent of the amount

of tax shown on the return, plus an additional .5 percent for each additional

month or fraction thereof that the amount remains unpaid, not exceeding 25

percent.

- An accuracy-related penalty on underpayments imposed under section

6662. Depending upon which component of the accuracy-related penalty is

applicable, a taxpayer may be liable for a 20 percent or 40 percent penalty.

16. Why did the IRS pick 6 months?

The March 23, 2009 memorandum communicating the approved penalty

framework for resolving the civil side of offshore voluntary disclosures is effective

for 6 months because the Service intends to re-evaluate the framework at that

time. Six months is a reasonable time to close out a number of voluntary

disclosures, evaluate our experience and the feedback from the practitioner

community, and decide whether or how to continue the practice going forward.

17. What happens at the end of 6 months? Will I get a better deal if I wait

to see what the IRS does at the end of 6 months?

Taxpayers should not wait until the end of the 6-month period to make their

voluntary disclosures as there is no guarantee that the taxpayer will still be

eligible or that the current penalty terms will be available after 6 months.

Taxpayers who wait until the end of the 6-month period run the risk that they will

be disqualified from the Voluntary Disclosure Practice. The IRS has stepped up

its enforcement efforts, including the use of John Doe summonses, to identify

taxpayers using offshore accounts and entities to avoid tax. In addition, the IRS

continues to receive information from whistleblowers and other taxpayers making

voluntary disclosures. If the IRS receives specific information about a taxpayer's

noncompliance before the taxpayer attempts to make a voluntary disclosure, the

disclosure will not be timely and the taxpayer will not be eligible for the criminal

and civil penalty relief available under the voluntary disclosure practice. Finally,

taxpayers run a substantial risk that the uniform penalty structure described in

the internal guidance will not be available past the 6-month deadline or that the

terms will be less beneficial to taxpayers.

18. What should I do if I am having difficulty obtaining my records from

overseas?

Our experience with offshore cases in recent years is that taxpayers are

successful in retrieving copies of statements and other records from foreign

banks when they genuinely attempt to do so. If assistance is needed, the agent

assigned to a case will work with the taxpayer in preparing a request that should

be acceptable to the foreign bank. The penalty framework described in the

March 23 memorandum will apply to all voluntary disclosures in process within

the 6-month timeframe, so difficulty in completing a voluntary disclosure started

during that period will not disqualify a cooperative taxpayer from the penalty

relief. The key is to notify the Service of your intent to make a voluntary

disclosure as soon as possible, and in any event, by September 23, 2009.

19. Are entities, such as corporations, partnerships and trusts eligible to

make voluntary disclosures?

Yes, entities are eligible to participate in the IRS's Voluntary Disclosure Practice.

20. Does the twenty percent penalty apply to entities? Does the twenty

percent penalty apply only to cash and securities held in foreign

accounts or entities or to tangible and intangible assets as well?

The twenty percent penalty applies to entities. The twenty percent penalty

applies to all assets (or at least the taxpayer's share) held by foreign entities

(e.g., trusts and corporations) for which the taxpayer was required to file

information returns, as well as all foreign assets (e.g., financial accounts, tangible

assets such as real estate or art, and intangible assets such as patents or stock

or other interests in a U.S. business) held or controlled by the taxpayer.

21. Are taxpayers required to complete a questionnaire as part of the

voluntary disclosure practice?

There is no specific questionnaire for taxpayers to complete.

22. Is there a list of questions taxpayers are expected to answer as part

of the voluntary disclosure process?

There is no standard list of questions for these cases. The Service may require

an interview with the taxpayer making a voluntary disclosure, depending on the

facts of each case.

23. When determining the highest amount in each undisclosed foreign

account for each year or the highest asset balance of all undisclosed

foreign entities for each year, what exchange rate should be used?

Convert foreign currency by using the foreign currency exchange rate at the end

of the year. In valuing currency of a country that uses multiple exchange rates,

use the rate that would apply if the currency in the account were converted into

United States dollars at the close of the calendar year. Each account is to be

valued separately.

24. Will I have to file or amend my old tax returns?

Yes. Any tax return not filed during the previous 6-year period that was

otherwise required to be filed by law, must be filed by the taxpayer. In addition,

any inaccurate returns for any of the 6 years must be amended by the taxpayer.

25. Besides federal income tax returns, what forms or other returns must

be filed?

- Copies of original and amended federal income tax returns for tax periods

covered by the voluntary disclosure;

- Complete and accurate amended federal income tax returns (or original

returns, if not previously filed) of the taxpayer for all tax years covered by

the voluntary disclosure;

- An explanation of previously unreported or underreported income or

incorrectly claimed deductions or credits related to undisclosed foreign

accounts or undisclosed foreign entities, including the reason(s) for the

error or omission;

- If the taxpayer is a decedent's estate, or is an individual who participated in

the failure to report the foreign account or foreign entity in a required gift or

estate tax return, either as executor or advisor, complete and accurate

amended estate or gift tax returns (original returns, if not previously filed)

necessary to correct the underreporting of assets held in or transferred

through undisclosed foreign accounts or foreign entities;

- Complete and accurate amended information returns required to be filed by

the taxpayer, including, but not limited to, Forms 3520, 3520-A, 5471, 5472,

926 and 8865 (or originals, if not previously filed) for all tax years covered

by the voluntary disclosure, for which the taxpayer requests relief; and

- Complete and accurate Form TD F 90.22-1, Report of Foreign Bank and

Financial Accounts, for foreign accounts maintained during calendar years

covered by the voluntary disclosure.

26. If I had an FBAR reporting obligation for years covered by the

voluntary disclosure, what version of the Form TD F 90-22.1 should I

use to report my interests in foreign accounts?

Taxpayers should use the current version of Form TD F 90-22.1, (revised in

October 2008), to file delinquent FBARs to report foreign accounts maintained in

prior years. The taxpayer may, however, rely on the instructions for the prior

version of the form (revised in July 2000) for purposes of determining who must

file to report foreign accounts maintained in 2007 and prior calendar years.

Under both versions of the form, citizens and residents must file.

27. If I don't have the ability to full pay can I still participate in the IRS's

Voluntary Disclosure Practice?

Yes. The March 23, 2009 guidance requires the taxpayer to fully pay all taxes

and interest for all years covered, and the Voluntary Disclosure penalty, as well

as all other unpaid, previously assessed liabilities, when the signed closing

agreement is returned to the Service. However, it is possible for a taxpayer who

is unable to make full payment at that time to submit a request that includes other

payment arrangements acceptable to the IRS.

The burden will be on the taxpayer to establish inability to pay, to the satisfaction

of the IRS, based on full disclosure of all assets and income sources, domestic

and offshore, under the taxpayer's control. Assuming that the IRS determines

that the inability to fully pay is genuine, the taxpayer must work out other financial

arrangements, acceptable to the IRS, to resolve all outstanding liabilities, in order

to be entitled to the penalty relief set forth in the March 23, 2009 guidance.

28. If the taxpayer and the IRS cannot agree to the terms of the closing

agreement, will mediation with Appeals be an option with respect to the

terms of the closing agreement?

No. The penalty framework and the agreement to limit tax exposure to the most

recent 6 years are package terms. If any part of the penalty framework is

unacceptable to the taxpayer, the case will be examined and all applicable

penalties may be imposed. Any tax and penalties imposed by the Service on

examination may be appealed, but not the Service's decision on the terms of the

closing agreement applying the penalty framework.

29. I have a client who may be eligible to make a voluntary disclosure.

What are my responsibilities to my client under Circular 230?

The IRS expects taxpayers to seek qualified legal advice and representation in

connection with considering and making a voluntary disclosure. If a taxpayer

seeks the advice of a tax practitioner but nonetheless decides not to make a

voluntary disclosure despite the taxpayer's noncompliance with Untied States tax

laws, Circular 230, section 10.21, requires the practitioner to advise the client of

the fact of the client's noncompliance and the consequences of the client's

noncompliance as provided under the Code and regulations.

30. Can I talk to the IRS without revealing my client's identity?

Hypothetical situations present a potential for misunderstanding that exists when

there is no assurance that the hypothetical contains all relevant facts. In

addition, tax practitioners should be aware that posing a situation as a

hypothetical does not satisfy the requirements of making a voluntary disclosure.

If the IRS receives information relating specifically to the taxpayer's undisclosed

foreign accounts or undisclosed foreign entities while the hypothetical question is

pending, the taxpayer may become ineligible to make a voluntary disclosure.

If practitioners have questions about the terms of the voluntary disclosure

program, they should contact the IRS Voluntary Disclosure Hotline at (215) 516-

4777, visit www.irs.gov, or contact their nearest CI office with questions. For a

list of CI offices, visit:

http://www.irs.gov/compliance/enforcement/article/0,,id=205909,00.html

The Offshore Voluntary Disclosure Program 2009

Topics

Recent Updates

Archives

Web Resources