The Internal Revenue Service ("IRS") recently announced a framework for resolving cases involving previously undisclosed foreign entities and offshore accounts held by or for the benefit of U.S. persons. The protocol set forth by the IRS will remain available to taxpayers up until September 23, 2009, unless sooner extended.
The announced framework requires that a request be submitted to the IRS asking for permission to make a voluntary disclosure. The request will contain a summary of the relevant facts and will initially be considered by the IRS Criminal Investigation Division (CI) which will make a preliminary determination as to whether the taxpayer is eligible to make a voluntary disclosure. That determination will be based in large part on whether the IRS has already commenced an investigation of the taxpayer seeking relief. If not, and if there are no extraordinary aspects whereby the IRS feels compelled to otherwise prosecute (for example, if there is some underlying criminal activity which gave rise to the money on deposit in the offshore account or foreign entity), then the request to proceed with a voluntary disclosure will likely be granted.
Once CI approves the making of a voluntary disclosure , the request will be forwarded to a special IRS unit in Philadelphia for civil processing where it will be worked by examiners who specialize in offshore issues.
If permission is granted to proceed, the IRS will resolve the case based upon the following guidelines:
1. All taxes and interest going back for a period of six (6) years will be assessed (unless the account or foreign entity is in existence for less than six (6) years, in which case the assessments will go back tot he first year the account or entity was opened). The taxpayer will be required to file or amend all returns for that period, including information returns and Treasury Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (commonly known as as "FBAR").
2. The IRS will assess either an accuracy or delinquency penalty on all years and there will be no consideration given to any "reasonable cause" exception.
3. The IRS will also assess a penalty equal to twenty (20%) percent of the amount in foreign bank accounts or entities in the year with the highest aggregate account or asset value.
4. If (i) the taxpayer did not open or cause any foreign account to be opened or entity formed (for example, if an account or entity is inherited); (ii) there has been no activity during the period the account or entity has been controlled by the taxpayer (that is, there were no deposits or withdrawals, etc.); and (iii) all applicable U.S, taxes have been paid on the original funds deposited into the accounts or entities (that is, other than earnings on the funds while in the account or entity), then the twenty (20%) percent penalty described in the previous paragraph will be reduced to five (5%) percent.
The taxpayer will be required to cooperate both civilly and criminally in order to benefit from the terms outlined above.
Thanks to my partner, Marvin Gutter, for the above summary.