Nefesh BNefesh

Guest Contributor: Jo Anne C. Adlerstein*

Disclaimer: This article was written by a guest contributor and NBN takes no responsibility for the information listed therein. Please consult with experienced tax advisors and lawyers regarding the specifics of your situation. 

On February 8, 2011, the U.S. Internal Revenue Service (IRS) announced the 2011 Offshore Voluntary Disclosure Initiative (2011 OVDI).  It did not announce an amnesty.  According to the Oxford English Dictionary, an “amnesty” is an official pardon or “an undertaking by the authorities to take no action against specified offences during a fixed period.” 

2011 OVDI is part of the IRS strategy to bring in revenue – overdue taxes , civil  penalties for not filing required forms or reporting all income, interest on late-paid taxes, interest on penalties, and penalties for not reporting the existence of offshore accounts . To understand why 2011 OVDI is not an amnesty requires an understanding of the IRS definition of “voluntary disclosure.”

BACKGROUND

“Voluntary Disclosure” has long been a part of Internal Revenue Service (IRS) procedure. Traditionally, persons who want to avoid being charged with the serious crimes of tax evasion, filing fraudulent returns, and failing to file tax returns have been able to ask IRS to accept their full disclosure and remediation in exchange for non-prosecution.  Such requests always been lodged with the Criminal Investigation Division (CID) of IRS . The Internal Revenue Manual explains at Section  9.5.11.9 that

“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.”

Undertaking a voluntary disclosure has always been a serious undertaking.

The 2011 Offshore Voluntary Disclosure Initiative (2011 OVDI)  marks the third time the Internal Revenue Service (IRS) has tried mass marketing to bring taxpayers into compliance with tax return filing requirements and the obligation to file Reports of Foreign Bank and Financial Accounts (FBARs). Hardly anyone recalls the 2003 program. The 2009 Voluntary Disclosure Program (2009 VDP) attracted 14,700 applicants. The Internal Revenue Service has still not finished processing the 2009 VDP applications. Some 2009 VDP applicants are still waiting for IRS to assign a Revenue Agent to examine their tax returns, FBARs and financial records. Other 2009 VDP applicants have successfully completed the program and received closing agreements from IRS. Some of these successful applicants are now being contacted by Special Agents of the IRS Criminal Investigation Division (CID) so that IRS can debrief them about their dealings with offshore banks, institutions, bankers and brokers. 

The 2011 OVDI offers people the chance to come clean with IRS by declaring all their unreported offshore income and accounts for years 2003-2010.  Instead of facing the risk of criminal prosecution or loss of their entire multi-million dollar Swiss bank accounts, they may be able to limit their exposure to paying taxes on unreported income, various penalties arising from the unpaid taxes, interest, and 25% of their total offshore bank and financial account  balances in the year with the highest balance. The precise benefits of the 2011 OVDI and the civil penalty exposure for eligible taxpayers who do not apply for the 2011 OVDI are detailed in the FAQs on the IRS website.