As we noted in our March and April postings, the IRS Offshore Voluntary Disclosure Initiative (“OVDI”) is available only through August 31, 2011. Participation in the OVDI program requires the submission of back tax returns and foreign bank account information, as well as an IRS submission letter and supporting documents, all of which takes time to compile. If you are an entity such as a corporation, partnership or trust, the documentation required of you may be more substantial and require even more time to assemble the information.
In an effort to supplement its previously released Q/A, the IRS updated its OVDI Frequently Asked Questions and Answers (Q/A) in June. Two of the most significant updates involve the ability to request a 90 day extension (Q/A 25.1) and the choice of “opting out” of the civil settlement structure of the OVDI program (Q/A 51.1, 51.2 and 51.3).
Q/A 25.1 states that a taxpayer may request an extension of the deadline to complete his or her submission “if the taxpayer can demonstrate a good faith attempt to fully comply” with the requirement to submit a complete application by August 31, 2011 and the taxpayer was unable to do so. The request for an extension must be sent to the IRS on or before August 31st, must include the required application, and must include a statement of the missing items, the reason they are missing, and the steps taken to obtain the missing information. The request must also include a signed agreement to extend the period to assess income taxes and the FBAR penalties. Requests must be approved by the IRS and will likely be denied unless most of the required information is part of the submission package to the IRS.
Q/A 51.1, 51.2 and 51.3 discuss a new concept of “opting out” of the civil settlement structure of the OVDI program. A taxpayer is still required to file the application and supporting documentation under the OVDI program, but the taxpayer has the option, assuming the facts of their case support it, to have the typical statutory IRS and FBAR penalties apply instead of the 20% accuracy related penalty and the 25% FBAR penalty. In certain cases, the opt out can result in lower overall penalties, particularly if the non-willful $10,000 per year FBAR penalty applies instead of the 25% penalty on the highest account balance. Opting out still allows a taxpayer the protection of avoiding criminal prosecution that is granted under the OVDI program, but in certain cases it can lower the civil penalties.
If you are considering applying for the program, it is important that you contact your tax advisor immediately.
Melinda Fellner Bramwit contributed to this post.