New Penalty Framework Released for Voluntary Disclosure of Unreported Offshore Income

by Graham Hill - Posted In: Tax

In late February, the IRS announced the 2011 Offshore Voluntary Disclosure Initiative (the “2011 OVDI”) providing a mechanism for taxpayers to avoid criminal prosecution relating to undisclosed foreign accounts and assets if they voluntarily come forward and report by August 31, 2011.  The 2011 OVDI  is a follow up to a similar voluntary disclosure program that ended in 2009 (the “2009 OVDI”).   (See our discussion of the new 2011 OVDI by clicking here to read our February 28, 2011 Gunster Tax Alert).  Recently, the IRS issued a Memorandum detailing the penalty framework to be applied under the 2011 OVDI and providing for coordination with penalties previously applied under the 2009 OVDI.   While the penalty framework under the 2011 OVDI is significantly harsher than the 2009 OVDI  (providing for a 25% versus 20% penalty and covering 7 years versus 5 years), the 2011 OVDI also provides for reducing penalties to 12.5% and even 5% for some taxpayers.

Although the Memorandum also states that examiners and their managers have no authority to negotiate different penalty percentages under the 2011 OVDI, in fairness to taxpayers that participated in the 2009 OVDI, the Memorandum explains that taxpayers that did participate in the 2009 OVDI who believe they meet the criteria for either the 12.5% or 5% reduced penalties under the 2011 OVDI can request the IRS to review their case to determine whether to apply the reduced penalty as appropriate.  The memorandum states that further guidance will be forthcoming in apply the new penalty framework to 2009 OVDI cases.

The 2011 OVDI, together with the Memorandum, further highlights and emphasizes the government’s increasing efforts to ensure that U.S. taxpayers with undisclosed foreign accounts and assets properly report and pay tax on those assets and accounts.  Taxpayers that continue to fail to report these accounts do so at ever increasing risk not only to their financial well being but to their personal  freedom from incarceration.

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