IRS Renews Offshore Voluntary Disclosure Initiative on Tougher Terms
Posted on February 9th, 2011 by bunilaw
The cost of delay
On February 8, 2011, IRS announced a renewed initiative for resolving unreported income held in offshore accounts or assets. The renewed initiative has an 8 year look-back period (instead of the 6 year look-back of the 2009 initiative). A new penalty rate of 25% replaces the prior 20% penalty rate.
There is an August 31 deadline for this initiative, but in contrast to the prior initiative, this deadline requires everything to be submitted by August 31. To meet this deadline, which requires the accurate preparation of eight years of original or amended tax returns, most taxpayers would have to begin quickly.
State income tax consequences
Taxpayers should be aware that filing amended returns with IRS implicates state income taxes as well. Under the IRS federal/state information sharing program, IRS shares “return information” with all 50 states. According to the IRS, “return information includes everything.. used by IRS that has anything to do with a person’s tax liability.”
That does not mean your state will require eight years of amended returns. It does mean your attorney should coordinate the IRS disclosure with your state agency to get you the best relief possible. In particular, your attorney may need to time the state disclosure in a way that does not destroy its voluntary character.
In states like New York, which has an ongoing, formal, voluntary disclosure program, it may be possible to file fewer than eight years of returns and avoid penalties. Even if your state does not have a formal voluntary disclosure program, it may be possible to negotiate a result anonymously with the state on better terms than the IRS initiative.
Not amnesty
Despite wide reporting otherwise this is not an amnesty program. Tax amnesty is authorized by a legislature and guarantees by statute how taxpayers will be treated if they disclose their noncompliance. In an amnesty program if the government doesn’t meet the terms of amnesty the taxpayer can successfully sue to get the promised result.
The IRS initiative for offshore accounts and assets establishes a policy for handling disclosures. But in contrast to an amnesty program, if the government doesn’t meet the terms of the voluntary disclosure initiative the taxpayer probably has no legal remedy.
I’m confident IRS will fulfill all of its promises to those who meet the conditions of the voluntary disclosure initiative. But because relief depends on strict compliance with the program, without judicial recourse if things don’t go as expected, taxpayers wishing to make voluntary disclosures should rely on experienced professional assistance.
Taxpayers who want to participate in the 2011 OVDI should obtain pre-clearance from the IRS Criminal Investigation unit. This, like all submissions to IRS in the OVDI process, is done on a non-anonymous basis. Because of this and other aspects of the OVDI process, taxpayers are well-advised to proceed only when represented by an attorney. Please note that successful pre-clearance does not guarantee acceptance into the OVDI.
Commissioner Shulman’s statement about the 2011 OVDI initiative can be found here.
keywords: offshore accounts, tax amnesty, state tax, New York state tax, offshore voluntary disclosure, voluntary disclosure, 2011 OVDI; federal/state information sharing, IRS criminal investigation
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