Suellen Wolfe on Offshore Voluntary Disclosure Initiatives

By Suellen Wolfe, J.D., LL.M.*

The Internal Revenue Code requires U.S. taxpayers to report income and pay taxes on worldwide income. [IRC §§ 61, 861, 862, 863, 864, 865. See also, IRS Publication 17 at Part Two, 5 (2011).]  Intentionally failing to report income earned on financial accounts or undisclosed assets may subject the taxpayer to significant penalties, including the fraud and foreign information return penalties. [See e.g., IRC §§ 6038, 7203, 7206, and 7207.] Criminal prosecution of the taxpayer is a possibility if the Internal Revenue Service (IRS) discovers required, but unreported, transactions. [Possible criminal charges related to tax returns include tax evasion [IRC § 7201], filing a false return [IRC § 7206(1)] and failure to file an income tax return [IRC § 7203]. Willfully failing to file an FBAR and willfully filing a false FBAR are both violations that are subject to criminal penalties under 31 USC § 5322. FBAR is the acronym for IRS Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts.] Voluntarily disclosing unreported accounts, and providing related required information to the IRS and paying any taxes due, achieves the taxpayer's compliance with the U.S. tax system. A voluntary disclosure occurs when communications between the taxpayer and the IRS's Criminal Investigation (CI) are timely, truthful, and completely disclosed as required by the IRC. [IRM 9.5.11.]

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 . . . In 2003, the IRS initiated its brief, and largely unsuccessful, Overseas Voluntary Compliance Initiative (OVCI). . . .

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On February 8, 2011, the IRS announced the 2011 Offshore Voluntary Disclosure Initiative (2011 OVDI). [IR-2011-14 (Feb. 8, 2011).] This initiative was a counter-part to CI's Voluntary Disclosure Practice outlined in the IRS Manual. [IRM et seq.] Like its predecessor, the 2011 OVDI addressed the civil side of a taxpayer's voluntary disclosure by defining the number of tax years covered and setting the applicable civil penalties.

The 2011 OVDI differed from the 2009 OVDI requiring taxpayers to pay back taxes, interest, and either an accuracy-related or delinquency-related penalty on up to 8 years (if applicable) of unreported income. [TIGTA Report at 3.] . . .

The 2011 OVDI ended on September 9, 2011. [IR-2011-94, Sept. 15, 2011.] IRS Commissioner Douglas Shulman announced applications for disclosure approached 12,000 and that a current "down payment" of $ 500 million has been made in collected taxes and interest. [Id.] Taxpayers who decided to opt out of the 2011 OVDI program were warned that "there are no guarantees that they would get the same deal" as those who voluntarily disclosed. [IR Release Doc 2011-19648.] On January 9, 2012, the IRS announced essentially an indefinite continuation of the 2011 OVDI with an increased penalty rate of 27.5 percent. [IR 2012-5.] The open deadline will continue to put pressure on U.S. taxpayers with overseas accounts to report and pay taxes on these accounts.

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* Suellen Wolfe is engaged in the private practice of law in Pennsylvania where she is also licensed as a Certified Public Accountant. She received her LL.M. (Taxation) from New York University School of Law. Ms. Wolfe has taught as a visiting professor at law schools throughout the United States. She previously served as Chief Deputy Attorney General, Tax and Finance Section and Chief Deputy Attorney General, Charitable Trusts and Organizations Section of the Office of Attorney General, Commonwealth of Pennsylvania and Counsel to the Pennsylvania Board of Finance & Revenue. Ms. Wolfe is the Update Author of Tax Planning for the Alternative Minimum Tax (Matthew Bender).

Information referenced herein is provided for educational purposes only. For legal advice applicable to the facts of your particular situation, you should obtain the services of a qualified attorney licensed to practice law in your state.

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