2011 Offshore Voluntary Disclosure Initiative: IRS Launches Second Offshore Voluntary Disclosure Initiative

Sullivan & Cromwell LLP - February 9, 2011

On February 8, 2011, the IRS, in a press release and related “frequently asked questions” (“FAQ”) announced that it is opening a second special voluntary disclosure initiative (the “OVDI”) for taxpayers that come forward before August 31, 2011 to report previously undisclosed foreign accounts, assets, and income. The initiative is structured similarly to the 2009 IRS Offshore Voluntary Disclosure Program (“2009 OVDP”) and similarly provides an opportunity for taxpayers to disclose with fewer penalties than might be applied without the initiative, while avoiding criminal prosecution. Taxpayers that voluntarily come forward and complete all OVDI requirements before August 31, 2011 will face a higher overall penalty structure than the 2009 OVDP, and a shorter timeline on which to file all relevant forms and amended returns as compared to the 2009 OVDP. The period covered by the OVDI is now eight years instead of six, covering tax years 2003 through 2010. Taxpayers will pay a 25 percent “offshore penalty” in addition to certain otherwise applicable accuracy and delinquency related penalties, rather than the 20 percent rate applied in the 2009 OVDP. The criteria from the 2009 program by which taxpayers making voluntary disclosures may qualify for a reduced offshore penalty of 5 percent have been expanded, and taxpayers with aggregate offshore accounts of less than $75,000 may now qualify for a reduced offshore penalty of 12.5 percent.

In addition to providing a penalty structure for previously unreported income and assets associated with tax liability, the initiative provides amnesty for taxpayers without unreported income that are delinquent in the filing of Reports of Foreign Bank and Financial Accounts (“FBARs”) and information returns with regard to controlled foreign corporations or foreign trusts.