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June 24, 2011

Taxpayers Must Use The 2011 Offshore Voluntary Disclosure Initiative To Make Voluntary Disclosures Of Unreported Foreign Bank Accounts or Risk Criminal Prosecution

Guest Author: Pilar Puerto, Esq., Columbus, Ohio

    Recently the Department of Justice prosecuted a taxpayer that had made a “quiet disclosure” of his offshore bank account instead of using the IRS’s 2009 Offshore Voluntary Disclosure Initiative (OVDI), demonstrating how serious the IRS is about taxpayers utilizing the OVDI process.

    As background, in spring of 2009, the IRS announced a settlement offer to taxpayers who had unreported offshore income for the 2003 through 2008 tax years. The terms of the settlement offer allowed these taxpayers to avoid facing criminal prosecution if they voluntarily came forward, reported their offshore bank accounts, and paid the back taxes, interest, and delinquency penalties for the past six years. The deadline for this voluntary disclosure was October 15, 2009.

    Some taxpayers choose not to use the OVDI process and they instead do what is called a “quiet disclosure.” A quiet disclosure is when a taxpayer files FBARS and amended returns for those undeclared foreign accounts and pays the related tax and interest for the previously unreported offshore income. The IRS warned, however, that if taxpayers made quiet disclosures instead of using the OVDI process, they risked being criminally prosecuted for the unreported years. This recent prosecution is a good illustration of how serious the IRS is about taxpayers utilizing this process.     

    In this case, the taxpayer had invested in an American medical device company. He arranged to have his income from this investment placed into a bank account in Switzerland that was then wired to his bank account in Bermuda thereby hiding his income and avoiding the payment of taxes. When the taxpayer learned that the Switzerland bank that he and his business partner used to funnel the taxpayer’s investment income had been making some disclosures to the IRS of undeclared accounts held by US taxpayers, the taxpayer decided to make a quiet and only partial disclosure of his foreign bank accounts and income. The taxpayer filed FBARS and amended tax returns for tax years 2003 through 2008. In his amended return for one tax year, 2006, he only reported part of the income. He then filed a second amended return to fully disclose all of the income. This, of course, came after a special agent from the IRS attempted to interview the taxpayer at his home. The taxpayer has now entered into a plea agreement for the charge of failing to report his foreign bank account and income to the Department of the Treasury.

    The IRS has now recently announced a second OVDI offer for taxpayers to disclose unreported income from hidden offshore accounts for tax years 2003 through 2010. The terms of the offer are similar to those in the settlement offer provided in 2009 by the IRS. The only change is the penalty structure. The general rule is that the penalty is 25% based on the amounts in the foreign bank accounts, but it can be as low as 5% for some taxpayers. It is important that taxpayers know how to take advantage of this program so that they do not have to be in a situation where they could face criminal charges, which can include prison time.

For details regarding how to file the voluntary disclosure follow the link below.

http://www.irs.gov/compliance/enforcement/article/0,,id=205909,00.html

Please view the site disclaimer regarding the advice on this blog.

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June 24, 2011

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