Offshore Voluntary Disclosure Initiative

On April 11, we summarized the 2011 Offshore Voluntary Disclosure Initiative (OVDI). Last week, the Internal Revenue Service updated its online FAQ, which provided several changes or expansions to the program.

First, in limited situations, the IRS will consider up to a 90-day extension to enter the program upon a taxpayer’s request and a good faith showing that all the relative materials cannot be submitted by the August 31 deadline. The request for a 90-day extension must include a statement of those items that are missing, the reasons why they are not included, and the steps taken to secure them. The extension must be made in writing and sent to the Austin campus on or before August 31.

Second, the IRS expanded its explanation of when a reduced 5% OVDI penalty may apply (in lieu of the 25% or 12.5% penalty). Taxpayers who are foreign residents and who meet the following conditions for all years subject to the OVDI may qualify for the reduced penalty: (1) taxpayer resides in a foreign country; (2) taxpayer has made a good faith showing implied with all reporting and payment requirements of their resident country; and (3) taxpayer has no more than $10,000 of U.S. source income in each OVDI year. For these taxpayers, the OVDI penalty will not apply to offshore non-financial assets purchased with funds which the taxpayer can show that all foreign and U.S. taxes were paid, provided the offshore taxable income attributable to such assets was included in the tax returns filed with the foreign tax authority.

Third, taxpayers who participated in the 2009 Offshore Voluntary Disclosure Program may be eligible for a reduced penalty of 5% if they meet the same criteria of the OVDI. Taxpayers who participated in the 2009 program should discuss the benefits provided under the 2011 program with their tax advisor to determine if they are eligible for reduced penalty.

Finally, the IRS provided additional guidance for taxpayers who elect to opt out of OVDI. Opting out is an irrevocable election that can only be made by the taxpayer. Taxpayers should review Questions 51.1, 51.2, and 51.3 of the FAQ to determine if opting out of OVDI is appropriate.