The IRS requires all US citizens – whether they actually reside in the US or not – to report earned income, including income earned and taxed abroad. In an attempt to encourage taxpayers who have an unreported income to come clean, the IRS offers an amnesty program called the 2011 Offshore Voluntary Disclosure Initiative (OVDI). The program deadline is August 31, 2011 (if you do not get an extension), so the time to come forward is now.
Why the IRS Amnesty Program?
Since 2009, the IRS has seen about 18,000 taxpayers turn themselves in for having unreported foreign income and bank accounts. It’s easy to see why this behavior is pleasing to the IRS: they increase their coffers with the tax and penalty revenue that they would not have otherwise received. So far the IRS has seen about $400,000,000 in revenue from it, and they are not even done processing all taxpayers that came forward.
For the individual, corporation, partnership or trust, it may seem antithetical to own up to foreign income and accounts, because liabilities for taxes, penalties, and interest will result. However, here are a few reasons taxpayers with unreported income and offshore financial accounts should come forward:
- The IRS is working smarter and getting more information from foreign governments and whistleblowers
- The IRS can criminally prosecute those who don’t come forward
- The reduction and avoidance of certain civil tax penalties
- Limit the civil tax resolution period between tax years 2003-2010.
Who Must Disclose Foreign Income and Accounts?
If you are a US citizen, you must disclose any income that you have received outside of the US, even if it has already been taxed by the nation in which you earned it. Also, if you have a foreign bank account that has had a balance exceed $10,000 at any time, you must report it. In addition to adequately marking a checkbox that requests this information on your Form 1040, you will need to file a Treasury Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts.
Penalties for failing to report this income include 20% on any back taxes owed, plus interest, plus an additional 25% of foreign accounts for failure to file. However, this may sometimes be reduced for certain taxpayers.
How to Participate in the IRS Offshore Voluntary Disclosure Initiative
Taxpayers are not automatically eligible for the OVDI. The procedures have changed since 2009, so be sure to follow the directions on the IRS’s OVDI page. In most cases, you need to get a pre-clearance by first faxing your name, address, social security number and date of birth to the IRS Criminal Investigation Lead Development Center at (215) 861-3050 (either you or your tax representative). Once cleared, the taxpayer needs to send the OVDI Letter for acceptance into the program. If accepted, you need to complete an OVDI package and send it to the IRS by August 31st, 2011. The IRS alludes taxpayers can skip the pre-clearance process and just start with step 2 (sending the OVDI letter).
You may be able to get a 90-day extension if you show good faith in cooperating by submitting signed agreements available at the IRS.gov website. You also need to provide a list of missing information, why they are missing, as well as what you are currently doing to get them. An extension is not guaranteed.
The longer you hide from the IRS, the worse things will get. If you have foreign income or other unreported accounts, get into the OVDI program by August 31, 2011, to avoid criminal charges. If you need help, consult a tax professional.