Foreign Financial Accounts and Assets Reporting and the 2011 OVDI

Foreign Financial Accounts and Assets Reporting and the 2011 OVDI

The Service has announced the launch of an initiative to give taxpayers the opportunity to voluntarily disclose previously-undisclosed offshore financial accounts and assets. IR-2011-14 (issued on February 8, 2011) explains that the 2011 Offshore Voluntary Disclosure Initiative (OVDI) is "designed to bring offshore money back into the U.S. tax system and help people with undisclosed income from hidden offshore accounts get current with their taxes." (See IR-2011-14, Feb. 8, 2011, "Second Special Voluntary Disclosure Initiative Opens; Those Hiding Assets Offshore Face Aug. 31 deadline," at http://www.irs.gov/newsroom/article/0,,id=235695,00.html) .

The 2011 initiative follows a similar initiative undertaken by the Service in 2009. Essentially, the main motivations for a taxpayer to participate in the initiative would be: (1) the possible avoidance of criminal prosecution, and (2) the payment of substantially lesser penalties. See "2011 Offshore Voluntary Disclosure Initiative Frequently Asked Questions and Answers," (question and answer # 4), at http://www.irs.gov/businesses/international/article/0,,id=235699,00.html. Taxpayers desiring to participate in the initiative have until August 31, 2011, to submit the necessary information to the Service. See IR-2011-14. Information on the initiative is found on the "2011 OVDI landing page", located on the IRS website at http://www.irs.gov/newsroom/article/0,,id=234900,00.html. The landing page provides links to a page listing the documents, worksheets, and forms that are required to participate in the initiative, to a page describing the initial process for making a voluntary disclosure under the 2011 OVDI, and to a very detailed and instructive questions and answers page.

The document submission requirements under the 2011 OVDI are detailed on the IRS website (See "2011 Offshore Voluntary Disclosure Initiative," at http://www.irs.gov/businesses/international/article/0,,id=235690,00.html). In addition to submitting the necessary documents on or before August 31, 2011, applicants must file all original and amended tax returns and include payment for taxes, interest, and accuracy-related penalties on or before that date. See IR-2011-14.

Foreign financial accounts and assets reporting requirements. In general, taxpayers are obligated to report or disclose foreign financial accounts primarily under IRC Section 6038D (See TAFCR § 6038D) and under provisions of the Bank Secrecy Act (see 31 U.S.C.S. § 5134).

IRC Section 6038D (Information with respect to foreign financial assets) provides in subsection (a):

"Any individual who, during any taxable year, holds any interest in a specified foreign financial asset shall attach to such person's return of tax . . . for such taxable year the information [described in IRC Section 6038D(c)) with respect to each such asset if the aggregate value of all such assets exceeds $50,000 (or such higher dollar amount as the Secretary may prescribe)."

31 U.S.C.S. Section 5134, part of the Bank Secrecy Act, provides:

"Considering the need to avoid impeding or controlling the export or import of monetary instruments and the need to avoid burdening unreasonably a person making a transaction with a foreign financial agency, the Secretary of the Treasury shall require a resident or citizen of the United States or a person in, and doing business in, the United States, to keep records, file reports, or keep records and file reports, when the resident, citizen, or person makes a transaction or maintains a relation for any person with a foreign financial agency."

In addition, 31 C.F.R. Section 1010.350 (Reports of foreign financial accounts) provides in part:

"Each United States person having a financial interest in, or signature or other authority over, a bank, securities, or other financial account in a foreign country shall report such relationship to the Commissioner of Internal Revenue for each year in which such relationship exists and shall provide such information as shall be specified in a reporting form prescribed under 31 U.S.C. 5314 to be filed by such persons. The form prescribed under section 5314 is the Report of Foreign Bank and Financial Accounts (TD-F 90-22.1), or any successor form."

(Note: 31 C.F.R. Section 1010.350 became effective March 1, 2011, and replaced 31 C.F.R. 103.24).

As stated in IRC Section 6038D(a) the foreign financial assets information required under IRC Section 6038D is to be attached to a taxpayer's return. In addition, as stated in the regulations under Title 31, the foreign financial accounts information required under the Bank Secrecy Act and 31 C.F.R. Sec. 1010.350 is to be provided by a taxpayer by filing Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (Please see TD F 90-22.1 and its instructions for further information, http://www.irs.gov/pub/irs-pdf/f90221.pdf). Taxpayers who have not met these initial reporting obligations described above are essentially given another opportunity to disclose, or in the words of the Service, "to get current on their tax returns". See "2011 Offshore Voluntary Disclosure Initiative" at http://www.irs.gov/newsroom/article/0,,id=234900,00.html.

It is important to note that a voluntary disclosure under the 2011 OVDI does not insulate a taxpayer from criminal prosecution. Internal Revenue Manual 9.5.11 (Voluntary Disclosure Practice) provides:

"(1) It is currently the practice of the IRS that a voluntary disclosure will be considered along with all other factors in the investigation in determining whether criminal prosecution will be recommended.  This voluntary disclosure practice creates no substantive or procedural rights for taxpayers, but rather is a matter of internal IRS practice, provided solely for guidance to IRS personnel.  Taxpayers cannot rely on the fact that other similarly situated taxpayers may not have been recommended for criminal prosecution.

(2)  A voluntary disclosure will not automatically guarantee immunity from prosecution; however, a voluntary disclosure may result in prosecution not being recommended.  This practice does not apply to taxpayers with illegal source income."

However, the Service has indicated that taxpayers may be able to avoid criminal prosecution by participating in the initiative. IR-2011-14 states: "The 2011 initiative offers clear benefits to encourage taxpayers to come in now rather than risk IRS detection. Taxpayers hiding assets offshore who do not come forward will face far higher penalty scenarios as well as the possibility of criminal prosecution." Furthermore, in IR-2011-14, Commissioner Shulman states: "This initiative offers [taxpayers] the chance to get certainty about how their case will be handled. Just as importantly, those who truly come in voluntarily can avoid criminal prosecution as well."

Given the compelling incentives of the possibility of avoiding criminal prosecution and avoiding paying great potential penalties down the road, practitioners would be wise to advise clients with undisclosed offshore financial accounts or assets to come forward under the 2011 OVDI.

for further guidance from the IRS on the 2011 Offshore Voluntary Disclosure Initiative, please see:

http://www.irs.gov/newsroom/article/0,,id=234900,00.html

RELATED LINKS: For further guidance on foreign financial accounts and assets reporting, please see:

Lexis Tax Advisor -- Federal Code § 6038D

Lexis Tax Advisor -- Federal Topical 4A:2.05

Lexis Tax Advisor -- Federal Topical 4A:3.02

Lexis Tax Advisor -- Federal Topical 4B:6.06

Lexis Tax Advisor -- Federal Topical 5B:17.02

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