June 8th, 2011

The IRS seems to be pulling out the stops to encourage more taxpayers to come clean and join its 2011 offshore voluntary disclosure initiative by the Aug. 31, 2011 deadline. These filings are very complex and have many unintended consequences. For some, joining the program means accepting huge tax bills — a hard thing to swallow. As the clock ticks, many taxpayers might not have sufficient time to get their affairs and filings in order to meet this deadline. Gathering years of offshore information isn’t an easy task.

Rather than scare these taxpayers away, the IRS made these important changes to make its initiative more attractive to join. First, the IRS will grant a 90-day extension providing the taxpayer makes a good faith attempt to file on time. Second, penalties for various less problematic scenarios have been lowered, including smaller accounts, inadvertent omissions, and inherited foreign accounts. Last, it provides various ways to opt out of the initiative if the taxpayer could do better with other filing options.

90-day extension: According to the IRS, “A taxpayer may request an extension of the deadline to complete his or her submission if the taxpayer can demonstrate a good faith attempt to fully comply with FAQ 25 on or before Aug. 31, 2011. The good faith attempt to fully comply must include the properly completed and signed agreements to extend the period of time to assess tax (including tax penalties) and to assess FBAR penalties. Requests for up to a 90-day extension must include a statement of those items that are missing, the reasons why they are not included, and the steps taken to secure them.”

Lower penalties under certain conditions: New FAQ 52 & 53 state, “Taxpayers making voluntary disclosures who fall into one of the three categories … will qualify for 5-percent or 12-percent offshore penalties, respectively.” Read these sections to see if you qualify for the lower penalties.

Consequences of opting out: New FAQ 51 shows why some taxpayers may want to opt out of the initiative and how they can do so. These escape hatches are helpful to many who are weighing their options to join the program in the first place. Rather than dither and miss the deadline, the IRS encourages you to join and allows you to opt out later. For example, suppose you join the program and realize you actually would not owe any income tax due to foreign tax credits or losses. The update states: “Electing to opt out might subject the taxpayer to a much smaller FBAR penalty than the penalty that would be due under the 2011 OVDI (or possibly no penalty at all, if the taxpayer’s violation was due to reasonable cause).”

This offshore disclosure full-court press is a nightmare for many, but the IRS seems to be improving its customer service with the extension, opt out, and lower penalty regime. The IRS motto may be “join first and opt out later.” The lower penalties are a good incentive for those who qualify to come clean. Why should they risk the same major problems as the purposeful tax cheats do? Skipping the program entirely might be the costliest and more problematic option, especially when you consider the possibility of criminal charges.

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