June 4th, 2011

The Internal Revenue Service issued guidelines this week to help U.S. citizens living overseas report their foreign bank accounts, and offered some taxpayers more time to get into a special program to tell the IRS about accounts they kept secret.

An Aug. 31 deadline to enter a voluntary disclosure program may be extended by as long as 90 days for some taxpayers, the IRS said. Thousands of people stepped forward in 2009 under an earlier special penalty deal offered in the program, hoping for leniency from the IRS, which has been cracking down hard on use of secret accounts in Switzerland and elsewhere overseas to evade taxes.

The extension of the deadline to get into the 2011 program met with surprise in some quarters. IRS officials had earlier sounded a harsh note, saying dates would be firm. IRS spokesman Anthony Burke said the agency heard of some difficulties in meeting the Aug. 31 deadline, however, and wanted to “provide an opportunity to those taxpayers that make a good faith effort to meet it to come in.”

The agency also outlined a way for people to get out of that program, which some tax advisers have criticized as poorly run. It also said it will be removing some uncooperative taxpayers.

According to advisers, some clients have seen their cases bounced from one agent to another around the country, causing confusion. The advisers also say that the IRS isn’t distinguishing between real tax evaders with big, complex accounts and others who have been caught up in the crackdown, such as heirs of Holocaust survivors who kept accounts secret out of ignorance or fear.

Now, a taxpayer who has entered the program can elect to remove his or her case from a civil-settlement structure and have it handled under a standard audit process. The agency said it thinks the opt-out option will be appropriate for a “minority of cases.”

An opt-out could result in the taxpayer owing more tax than under the voluntary disclosure program—but it also could mean less tax, the IRS said. A centralized committee will review each case, weighing a statement by the taxpayer, recommended penalties and case history. If a taxpayer opts out of the program, the IRS said he or she won’t be penalized.

The IRS itself will be able to remove taxpayers from the program if there is a record of them being “demonstrably uncooperative” and the IRS examiner thinks the case can’t be resolved within a certain time frame.

The new reporting guidelines and opt-out policy met a positive initial response from some tax advisers. The guidelines “appear well thought out” and should help account holders to comply, said Charles P. Rettig, a partner at Beverly Hills, Calif., law firm Hochman Salkin Rettig Toscher & Perez. The opt-out policy seems to balance the needs of the government with those of a very diverse group of taxpayers and advisers, Mr. Rettig said.

The guidelines for entering the 2011 program lay out the civil penalties a participant may avoid. They also outline the criminal charges an account holder may face if the IRS discovers an account before it is disclosed. These include tax evasion, which can result in a prison term of up to five years and a fine of up to $250,000. Filing a false return carries a prison term of up to three years and a fine of up to $250,000.

The top penalty in the 2011 program, which applies to accounts in existence in the years 2003 through 2010, is set at 25%, in contrast to 20% under the first program. There also is a new 12.5% penalty for people with smaller offshore accounts—those with balances that didn’t go over $75,000 for the years that apply.