As expected, on February 8th the Internal Revenue Service announced a new voluntary disclosure initiative. The new initiative is similar to the 2009 initiative, which had over 15,000 participants report their undeclared offshore accounts to the IRS. We anticipate that a huge wave of taxpayers will take advantage of the new initiative. We also expect that in the coming months several foreign banks will begin turning in their US clients.
The 2009 voluntary disclosure initiative was a result of the US government's crackdown on UBS AG. Using the data obtained through the 2009 program, the IRS is investigating a number of foreign financial institutions that, in addition to UBS AG, have conspired with clients to hide funds offshore. The banks under investigation are located not just in Switzerland, but in other parts of the world as well. The IRS has been increasingly focused on investigating banks in Hong Kong and Singapore.
Under the new initiative, taxpayers with undeclared offshore accounts, entities, and assets have until August 31st to come forward and report their previously undeclared income and accounts for the past eight years. In exchange, the IRS will not recommend criminal prosecution to the Department of Justice, assuming the disclosures are truthful, timely, and complete.
The new 2011 initiative requires participants to pay back taxes, interest and penalties on unreported income for the past eight years. The taxpayers will be required to amend their tax returns for 2003 through 2010. In addition, the taxpayers must pay a 25% penalty on the highest aggregate value of their undeclared foreign accounts and assets in that period. Under limited circumstances, taxpayers may be eligible for a reduced penalty of 5%. There is also a new reduced penalty provision of 12.5% for taxpayers with foreign undeclared assets not exceeding $75,000 in any year covered by the initiative.
This initiative may be the last opportunity for taxpayers with undisclosed offshore accounts to take advantage of a favorable penalty framework. The IRS treats taxpayers who come forward voluntarily to fix past problems much more leniently than those who wait and are caught. The maximum civil penalty for failure to file a Foreign Bank Account Report (FBAR) is 50% of the highest account value for each year that the form is not filed. Taxpayers who do not participate in the initiative may face much stiffer penalties or criminal prosecution.