IRS Requirements for Offshore Assets  

While it is certainly legal to have an account outside the U.S. and there are many situations where it makes sense, the critical point is to disclose the account on your U.S. income tax return and, in some cases, on the FBAR. Willful failure to file this form can result in substantial civil and criminal penalties, including up to 5 years in prison or both. Any United States person who: has a financial interest in; signature authority over; or “other authority over” financial accounts in a foreign country if the aggregate value of these accounts exceeds $10,000 at any time during the calendar year is required to file an FBAR. This includes a variety of financial accounts and instruments. This is true whether the account is maintained for his or her own benefit, or for the benefit of others including non-U.S. persons.

 The FBAR must also be filed where the owner of record is a corporation, partnership, or trust and a U.S. person owns directly or indirectly more than 50% of total value of the stock, profits, or beneficial interest, respectively. This is true even if a person can control the disposition of money or other property in an account by delivery of a document containing his or her signature (or his or her signature and that of one or more other persons) to the bank or other person with whom the account is maintained.  

The IRS has stated that if all taxable income was reported and taxed, but FBARs were not filed, taxpayers should file the delinquent FBARs, with copies of relevant tax returns and an explanatory statement, by September 23, 2009. In that case, the IRS will not impose a penalty for the late filed FBARs.

 CAVEAT: Extensions granted for federal tax returns do not extend the due date for filing the FBAR. Also, lawyers and CPAs are obliged to make reasonable inquiries when a client provides information that suggests participation in overseas transactions or accounts subject to FBAR. Finally, if a FBAR is filed, be certain that any income earned on the account is reported on Form 1040. Also, be aware that it usually is not the case that income earned in passive “offshore” accounts is free from U.S. tax until repatriated.

 IRS Announces September 23, 2009 Requirements For Disclosing Offshore Assets

 IRS recently announced a new penalty structure designed to encourage taxpayers with non-U.S. assets to come into its voluntary disclosure program, offering those who comply the chance to avoid criminal prosecution and multiple civil penalties. Under these voluntary disclosure guidelines, which are open until September 23, 2009, IRS will look back six years and taxpayers must pay taxes, interest, and an accuracy or delinquency penalty for all years. In lieu of all other penalties (i.e., failure to file FBARs, etc.) taxpayers will be assessed a penalty equal to 20% of the amount in foreign bank accounts and entities in the year with the highest aggregate account asset value. In announcing this new program, IRS Commissioner Douglas Shulman stated that this is “a firm but fair resolution to these cases. For taxpayers who continue to hide their head in the sand, the situation will only become more dire.”  

The IRS has specific eligibility requirements to participate in this program. If you, or someone you know may qualify for this new program, please contact the firm to discuss the IRS’ eligibility requirements and learn how we can assist you with your tax-related issues.

Ralph Sayers, C. P.A. is experienced in handling all tax collection and enforcement related matters.

More Information

Frequently Asked Questions – Revised June 24, 2009

1. Why did the IRS issue internal guidance regarding offshore activities
now?

The IRS has had a voluntary disclosure practice in its Criminal Manual for many
years. Once IRS Criminal Investigation has determined preliminary acceptance
into the voluntary disclosure program, the case is referred to the civil side of IRS
for examination and resolution of taxes and penalties. Recent IRS enforcement
efforts in the offshore area have led to an increased number of voluntary
disclosures. Additional taxpayers are considering making voluntary disclosures
but are reportedly reluctant to come forward because of uncertainty about the
amount of their liability for potentially onerous civil penalties. In order to resolve
these cases in an organized, coordinated manner and to make exposure to civil
penalties more predictable, the IRS has decided to centralize the civil processing
of offshore voluntary disclosures and to offer a uniform penalty structure for
taxpayers who voluntarily come forward. These steps were taken to ensure that
taxpayers are treated consistently and predictably.

2. What is the objective of these steps?

The objective is to bring taxpayers that have used undisclosed foreign accounts
and undisclosed foreign entities to avoid or evade tax into compliance with
United States tax laws. Additionally, the information gathered from taxpayers
making voluntary disclosures under this practice will be used to further the IRS’s
understanding of how foreign accounts and foreign entities are promoted to
United States taxpayers as ways to avoid or evade tax. Data gathered will be
used in developing additional strategies to inhibit promoters and facilitators from
soliciting new clients.

3. Why should I make a voluntary disclosure?

Taxpayers with undisclosed foreign accounts or entities should make a voluntary
disclosure because it enables them to become compliant, avoid substantial civil
penalties and generally eliminate the risk of criminal prosecution. Making a
voluntary disclosure also provides the opportunity to calculate, with a reasonable
degree of certainty, the total cost of resolving all offshore tax issues. Taxpayers
who do not submit a voluntary disclosure run the risk of detection by the IRS and
the imposition of substantial penalties, including the fraud penalty and foreign
information return penalties, and an increased risk of criminal prosecution.

4. What is the IRS’s Voluntary Disclosure Practice?

The Voluntary Disclosure Practice is a longstanding practice of IRS Criminal
Investigation of taking timely, accurate, and complete voluntary disclosures into
account in deciding whether to recommend to the Department of Justice that a
taxpayer be criminally prosecuted. It enables noncompliant taxpayers to resolve
their tax liabilities and minimize their chances of criminal prosecution. When a
taxpayer truthfully, timely, and completely complies with all provisions of the
voluntary disclosure practice, the IRS will not recommend criminal prosecution to
the Department of Justice.

5. How do I make a voluntary disclosure and where should I submit my
voluntary disclosure?

A voluntary disclosure is made by following the procedures described in I.R.M.
9.5.11.9. Tax professionals or individuals who want to initiate a voluntary
disclosure, should call their local CI office. For a list of CI offices, visit:
http://www.irs.gov/compliance/enforcement/article/0,,id=205909,00.html
Taxpayers with questions may call the IRS Voluntary Disclosure Hotline at
(215)516-4777, visit www.irs.gov, or contact their nearest CI office.

6. What form should my voluntary disclosure take?

You should send a letter to the nearest Special Agent in Charge, IRS Criminal
Investigation, stating that you wish to make a voluntary disclosure. Ideally, the
letter should contain all your identifying information, including name, address,
Social Security Number or other Taxpayer Identification Number, passport
number and date of birth, and should also include an explanation of any
previously unreported or underreported income or incorrectly claimed deductions
or credits related to undisclosed foreign accounts or undisclosed foreign entities,
including the reason(s) for the error or omission. It should also include a power
of attorney (Form 2848), if you are represented, and daytime contact information
for you or your representative. 

If you have already completed the amended or
delinquent returns, those should be submitted with the letter, but it is not
necessary to include them with the initial submission if you are unable to do so.

At a minimum, however, the initial submission must include the taxpayer’s name
and identifying information described above. IRS Criminal Investigation will
follow up on the facts and circumstances to assess the timeliness, completeness,
and truthfulness of the voluntary disclosure.

7. I'm currently under examination. Can I come in under voluntary
disclosure?

No. If the IRS has initiated a civil examination, regardless of whether it relates to
undisclosed foreign accounts or undisclosed foreign entities, the taxpayer will not
be eligible to come in under the IRS’s Voluntary Disclosure Practice.

8. I have an offshore merchant account upon which I have not reported all
of the income. Can I come in under the IRS’s voluntary disclosure
practice?

Yes. Taxpayers with unreported income from an offshore merchant account
can make a voluntary disclosure.

9. I have properly reported all my taxable income but I only recently
learned that I should have been filing FBARs in prior years to report my
personal foreign bank account or to report the fact that I have signature
authority over bank accounts owned by my employer. May I come
forward under the voluntary disclosure practice to correct this?

The purpose for the voluntary disclosure practice is to provide a way for
taxpayers who did not report taxable income in the past to voluntarily come
forward and resolve their tax matters. Thus, If you reported and paid tax on all
taxable income but did not file FBARs, do not use the voluntary disclosure
process.

For taxpayers who reported and paid tax on all their taxable income for prior
years but did not file FBARs, you should file the delinquent FBAR reports
according to the instructions and attach a statement explaining why the reports
are filed late. Send copies of the delinquent FBARs, together with copies of tax
returns for all relevant years, by September 23, 2009, to the Philadelphia
Offshore Identification Unit at:

Internal Revenue Service
11501 Roosevelt Blvd.
South Bldg., Room 2002
Philadelphia, PA 19154
Attn: Charlie Judge, Offshore Unit, DP S-611
The IRS will not impose a penalty for the failure to file the FBARs.

10. What if the taxpayer has already filed amended returns reporting the
additional unreported income, without making a voluntary disclosure
(i.e., quiet disclosure)?

The IRS is aware that some taxpayers have attempted so-called “quiet”
disclosures by filing amended returns and paying any related tax and interest for
previously unreported offshore income without otherwise notifying the IRS.
Taxpayers who have already made “quiet” disclosures may take advantage of
the penalty framework applicable to voluntary disclosure requests regarding
unreported offshore accounts and entities. Those taxpayers must send
previously submitted documents, including copies of amended returns, to their
local CI office by September 23, 2009. See FAQ 5.
Taxpayers are strongly encouraged to come forward under the Voluntary
Disclosure Practice to make timely, accurate, and complete disclosures. Those
taxpayers making “quiet” disclosures should be aware of the risk of being
examined and potentially criminally prosecuted for all applicable years.

The IRS has identified, and will continue to identify, amended tax returns
reporting increases in income. The IRS will be closely reviewing these returns to
determine whether enforcement action is appropriate.

11. Is a taxpayer who sought relief under the IRS’s Voluntary Disclosure
Practice before this internal guidance was issued, eligible for the
terms described in this internal guidance?

Yes. If a taxpayer sought relief under the IRS’s Voluntary Disclosure Practice
before this internal guidance was issued he or she may be eligible, as long as the
voluntary disclosure has not yet resulted in an assessment.

12. How does the penalty framework work? Can you give us an example?
Assume the taxpayer has the following amounts in a foreign account over a
period of six years. Although the amount on deposit may have been in the
account for many years, it is assumed for purposes of the example that it is not
unreported income in 2003.

(NOTE: This example does not provide for compounded interest, and assumes
the taxpayer is in the 35-percent tax bracket, files a return but does not include
the foreign account or the interest income on the return, and the maximum
applicable penalties are imposed.)

If the taxpayer comes forward and has their voluntary disclosure accepted
by the IRS, they face this potential scenario:

They would pay $386,000 plus interest. This includes:
- Tax of $105,000 (six years at $17,500) plus interest,
- An accuracy-related penalty of $21,000 (i.e., $105,000 x 20%), and
- An additional penalty, in lieu of the FBAR and other potential penalties that
may apply, of $260,000 (i.e., $1,300,000 x 20%).
If the taxpayer didn’t come forward and the IRS discovered their offshore
activities, they face up to $2,306,000 in tax, accuracy-related penalty, and
FBAR penalty. The taxpayer would also be liable for interest and possibly
Year Amount on Deposit Interest Income Account Balance
2003 $ 1 ,000,000 $ 50,000 $ 1 ,050,000
2004 $ 5 0,000 $ 1 ,100,000
2005 $ 5 0,000 $ 1 ,150,000
2006 $ 5 0,000 $ 1 ,200,000
2007 $ 5 0,000 $ 1 ,250,000
2008 $ 5 0,000 $ 1 ,300,000

additional penalties, and an examination could lead to criminal
prosecution.
The civil liabilities potentially include:
- The tax and accuracy-related penalty, plus interest, as described above,
- FBAR penalties totaling up to $2,175,000 for willful failures to file complete
and correct FBARs (2003- $100,000, 2004 - $100,000, 2005 - $100,000,
2006 - $600,000, 2007 - $625,000 and 2008 - $650,000),
- The potential of having the fraud penalty (75 percent) apply, and
- The potential of substantial additional information return penalties if the
foreign account or assets is held through a foreign entity such as a trust or
corporation and required information returns were not filed.
Note that if the foreign activity started more than six years ago, the Service may
also have the right to examine additional years.

13. What years are included in the 6-year period?
A taxpayer is expected to file correct delinquent or amended tax returns for tax
year 2008 back to 2003.

14. What are some of the criminal charges I might face if I don't come in
under voluntary disclosure and the IRS finds me?
Possible criminal charges related to tax returns include tax evasion (26 U.S.C.
§ 7201), filing a false return (26 U.S.C. § 7206(1)) and failure to file an income
tax return (26 U.S.C. § 7203). The failure to file an FBAR and the filing of a false
FBAR are both violations that are subject to criminal penalties under 31 U.S.C.
§ 5322.
A person convicted of tax evasion is subject to a prison term of up to five years
and a fine of up to $250,000. Filing a false return subjects a person to a prison
term of up to three years and a fine of up to $250,000. A person who fails to file
a tax return is subject to a prison term of up to one year and a fine of up to
$100,000. Failing to file an FBAR subjects a person to a prison term of up to ten
years and criminal penalties of up to $500,000.

15. What are some of the civil penalties that might apply if I don't come in
under voluntary disclosure and the IRS finds me? How do they work?
The following is a summary of potential reporting requirements and civil penalties
that could apply to a taxpayer, depending on his or her particular facts and
circumstances.

- A penalty for failing to file the Form TD F 90-22.1 (Report of Foreign Bank
and Financial Accounts, commonly known as an “FBAR”). United States
citizens, residents and certain other persons must annually report their
direct or indirect financial interest in, or signature authority (or other
authority that is comparable to signature authority) over, a financial account
that is maintained with a financial institution located in a foreign country if,
for any calendar year, the aggregate value of all foreign accounts exceeded
$10,000 at any time during the year. Generally, the civil penalty for willfully
failing to file an FBAR can be as high as the greater of $100,000 or 50
percent of the total balance of the foreign account. See 31 U.S.C.
§ 5321(a)(5). Nonwillful violations are subject to a civil penalty of not more
than $10,000.

- A penalty for failing to file Form 3520, Annual Return to Report
Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts.
Taxpayers must also report various transactions involving foreign trusts,
including creation of a foreign trust by a United States person, transfers of
property from a United States person to a foreign trust and receipt of
distributions from foreign trusts under section 6048. This return also reports
the receipt of gifts from foreign entities under section 6039F. The penalty
for failing to file each one of these information returns, or for filing an
incomplete return, is 35 percent of the gross reportable amount, except for
returns reporting gifts, where the penalty is five percent of the gift per
month, up to a maximum penalty of 25 percent of the gift.
- A penalty for failing to file Form 3520-A, Information Return of Foreign Trust
With a U.S. Owner. Taxpayers must also report ownership interests in
foreign trusts, by United States persons with various interests in and
powers over those trusts under section 6048(b). The penalty for failing to
file each one of these information returns or for filing an incomplete return,
is five percent of the gross value of trust assets determined to be owned by
the United States person.
- A penalty for failing to file Form 5471, Information Return of U.S. Person
with Respect to Certain Foreign Corporations. Certain United States
persons who are officers, directors or shareholders in certain foreign
corporations (including International Business Corporations) are required to
report information under sections 6035, 6038 and 6046. The penalty for
failing to file each one of these information returns is $10,000, with an
additional $10,000 added for each month the failure continues beginning 90
days after the taxpayer is notified of the delinquency, up to a maximum of
$50,000 per return.
- A penalty for failing to file Form 5472, Information Return of a 25% Foreign-
Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade
or Business. Taxpayers may be required to report transactions between a

25 percent foreign-owned domestic corporation or a foreign corporation
engaged in a trade or business in the United States and a related party as
required by sections 6038A and 6038C. The penalty for failing to file each
one of these information returns, or to keep certain records regarding
reportable transactions, is $10,000, with an additional $10,000 added for
each month the failure continues beginning 90 days after the taxpayer is
notified of the delinquency, up to a maximum of $50,000 per return.
- A penalty for failing to file Form 926, Return by a U.S. Transferor of
Property to a Foreign Corporation. Taxpayers are required to report
transfers of property to foreign corporations and other information under
section 6038B. The penalty for failing to file each one of these information
returns is ten percent of the value of the property transferred, up to a
maximum of $100,000 per return, with no limit if the failure to report the
transfer was intentional.
- A penalty for failing to file Form 8865, Return of U.S. Persons With Respect
to Certain Foreign Partnerships. United States persons with certain
interests in foreign partnerships use this form to report interests in and
transactions of the foreign partnerships, transfers of property to the foreign
partnerships, and acquisitions, dispositions and changes in foreign
partnership interests under sections 6038, 6038B, and 6046A. Penalties
include $10,000 for failure to file each return, with an additional $10,000
added for each month the failure continues beginning 90 days after the
taxpayer is notified of the delinquency, up to a maximum of $50,000 per
return, and ten percent of the value of any transferred property that is not
reported, subject to a $100,000 limit.
- Fraud penalties imposed under sections 6651(f) or 6663. Where an
underpayment of tax, or a failure to file a tax return, is due to fraud, the
taxpayer is liable for penalties that, although calculated differently,
essentially amount to 75 percent of the unpaid tax.
- A penalty for failing to file a tax return imposed under section 6651(a)(1).
Generally, taxpayers are required to file income tax returns. If a taxpayer
fails to do so, a penalty of 5 percent of the balance due, plus an additional 5
percent for each month or fraction thereof during which the failure continues
may be imposed. The penalty shall not exceed 25 percent.
- A penalty for failing to pay the amount of tax shown on the return under
section 6651(a)(2). If a taxpayer fails to pay the amount of tax shown on
the return, he or she may be liable for a penalty of .5 percent of the amount
of tax shown on the return, plus an additional .5 percent for each additional
month or fraction thereof that the amount remains unpaid, not exceeding 25
percent.

- An accuracy-related penalty on underpayments imposed under section
6662. Depending upon which component of the accuracy-related penalty is
applicable, a taxpayer may be liable for a 20 percent or 40 percent penalty.
16. Why did the IRS pick 6 months?
The March 23, 2009 memorandum communicating the approved penalty
framework for resolving the civil side of offshore voluntary disclosures is effective
for 6 months because the Service intends to re-evaluate the framework at that
time. Six months is a reasonable time to close out a number of voluntary
disclosures, evaluate our experience and the feedback from the practitioner
community, and decide whether or how to continue the practice going forward.
17. What happens at the end of 6 months? Will I get a better deal if I wait
to see what the IRS does at the end of 6 months?
Taxpayers should not wait until the end of the 6-month period to make their
voluntary disclosures as there is no guarantee that the taxpayer will still be
eligible or that the current penalty terms will be available after 6 months.
Taxpayers who wait until the end of the 6-month period run the risk that they will
be disqualified from the Voluntary Disclosure Practice. The IRS has stepped up
its enforcement efforts, including the use of John Doe summonses, to identify
taxpayers using offshore accounts and entities to avoid tax. In addition, the IRS
continues to receive information from whistleblowers and other taxpayers making
voluntary disclosures. If the IRS receives specific information about a taxpayer’s
noncompliance before the taxpayer attempts to make a voluntary disclosure, the
disclosure will not be timely and the taxpayer will not be eligible for the criminal
and civil penalty relief available under the voluntary disclosure practice. Finally,
taxpayers run a substantial risk that the uniform penalty structure described in
the internal guidance will not be available past the 6-month deadline or that the
terms will be less beneficial to taxpayers.
18. What should I do if I am having difficulty obtaining my records from
overseas?
Our experience with offshore cases in recent years is that taxpayers are
successful in retrieving copies of statements and other records from foreign
banks when they genuinely attempt to do so. If assistance is needed, the agent
assigned to a case will work with the taxpayer in preparing a request that should
be acceptable to the foreign bank. The penalty framework described in the
March 23 memorandum will apply to all voluntary disclosures in process within
the 6-month timeframe, so difficulty in completing a voluntary disclosure started
during that period will not disqualify a cooperative taxpayer from the penalty
relief. The key is to notify the Service of your intent to make a voluntary
disclosure as soon as possible, and in any event, by September 23, 2009.
 
19. Are entities, such as corporations, partnerships and trusts eligible to
make voluntary disclosures?
Yes, entities are eligible to participate in the IRS’s Voluntary Disclosure Practice.
20. Does the twenty percent penalty apply to entities? Does the twenty
percent penalty apply only to cash and securities held in foreign
accounts or entities or to tangible and intangible assets as well?
The twenty percent penalty applies to entities. The twenty percent penalty
applies to all assets (or at least the taxpayer’s share) held by foreign entities
(e.g., trusts and corporations) for which the taxpayer was required to file
information returns, as well as all foreign assets (e.g., financial accounts, tangible
assets such as real estate or art, and intangible assets such as patents or stock
or other interests in a U.S. business) held or controlled by the taxpayer.
21. Are taxpayers required to complete a questionnaire as part of the
voluntary disclosure practice?
There is no specific questionnaire for taxpayers to complete.
22. Is there a list of questions taxpayers are expected to answer as part of
the voluntary disclosure process?
There is no standard list of questions for these cases. The Service may require
an interview with the taxpayer making a voluntary disclosure, depending on the
facts of each case.
23. When determining the highest amount in each undisclosed foreign
account for each year or the highest asset balance of all undisclosed
foreign entities for each year, what exchange rate should be used?
Convert foreign currency by using the foreign currency exchange rate at the end
of the year. In valuing currency of a country that uses multiple exchange rates,
use the rate that would apply if the currency in the account were converted into
United States dollars at the close of the calendar year. Each account is to be
valued separately.
24. Will I have to file or amend my old tax returns?
Yes. Any tax return not filed during the previous 6-year period that was
otherwise required to be filed by law, must be filed by the taxpayer. In addition,
any inaccurate returns for any of the 6 years must be amended by the taxpayer.

25. Besides federal income tax returns, what forms or other returns must
be filed?
- Copies of original and amended federal income tax returns for tax periods
covered by the voluntary disclosure;
- Complete and accurate amended federal income tax returns (or original
returns, if not previously filed) of the taxpayer for all tax years covered by
the voluntary disclosure;
- An explanation of previously unreported or underreported income or
incorrectly claimed deductions or credits related to undisclosed foreign
accounts or undisclosed foreign entities, including the reason(s) for the
error or omission;
- If the taxpayer is a decedent’s estate, or is an individual who participated in
the failure to report the foreign account or foreign entity in a required gift or
estate tax return, either as executor or advisor, complete and accurate
amended estate or gift tax returns (original returns, if not previously filed)
necessary to correct the underreporting of assets held in or transferred
through undisclosed foreign accounts or foreign entities;
- Complete and accurate amended information returns required to be filed by
the taxpayer, including, but not limited to, Forms 3520, 3520-A, 5471, 5472,
926 and 8865 (or originals, if not previously filed) for all tax years covered
by the voluntary disclosure, for which the taxpayer requests relief; and
- Complete and accurate Form TD F 90.22-1, Report of Foreign Bank and
Financial Accounts, for foreign accounts maintained during calendar years
covered by the voluntary disclosure.
26. If I had an FBAR reporting obligation for years covered by the
voluntary disclosure, what version of the Form TD F 90-22.1 should I
use to report my interests in foreign accounts?
[Revised June 24, 2009] Taxpayers should use the current version of Form TD
F 90-22.1, (revised in October 2008), to file delinquent FBARs to report foreign
accounts maintained in prior years. The taxpayer may, however, rely on the
instructions for the prior version of the form (revised in July 2000) for purposes of
determining who must file to report foreign accounts maintained in 2008 and prior
calendar years.
Although the FBAR was revised in October 2008, IRS News Release IR-2009-58
(June 5, 2009) and IRS Announcement 2009-51, both available at
http://www.irs.gov/newsroom/article/0,,id=209418,00.html, permit the use of the
definition of "United States person" in the prior version of the FBAR in

determining who must file FBARs that are due on June 30, 2009. Accordingly,
for all FBARs that are due in the current and prior years, the term "United States
person" means (1) a citizen or resident of the United States; (2) a domestic
partnership; (3) a domestic corporation; or (4) a domestic estate or trust.

27. If I don’t have the ability to full pay can I still participate in the IRS's
Voluntary Disclosure Practice?
Yes. The March 23, 2009 guidance requires the taxpayer to fully pay all taxes
and interest for all years covered, and the Voluntary Disclosure penalty, as well
as all other unpaid, previously assessed liabilities, when the signed closing
agreement is returned to the Service. However, it is possible for a taxpayer who
is unable to make full payment at that time to submit a request that includes other
payment arrangements acceptable to the IRS.
The burden will be on the taxpayer to establish inability to pay, to the satisfaction
of the IRS, based on full disclosure of all assets and income sources, domestic
and offshore, under the taxpayer’s control. Assuming that the IRS determines
that the inability to fully pay is genuine, the taxpayer must work out other financial
arrangements, acceptable to the IRS, to resolve all outstanding liabilities, in order
to be entitled to the penalty relief set forth in the March 23, 2009 guidance.

28. If the taxpayer and the IRS cannot agree to the terms of the closing
agreement, will mediation with Appeals be an option with respect to
the terms of the closing agreement?
No. The penalty framework and the agreement to limit tax exposure to the most
recent 6 years are package terms. If any part of the penalty framework is
unacceptable to the taxpayer, the case will be examined and all applicable
penalties may be imposed. Any tax and penalties imposed by the Service on
examination may be appealed, but not the Service’s decision on the terms of the
closing agreement applying the penalty framework.


31. How can the IRS propose adjustments to tax for a six-year period
without either an agreement from the taxpayer or a statutory
exception to the normal three-year statute of limitations for making
those adjustments?

Going back six years is part of the resolution offered by the IRS for resolving
offshore voluntary disclosures. The taxpayer must agree to assessment of the
liabilities for those years in order to get the benefit of the reduced penalty
framework. If the taxpayer does not agree to the tax, interest and penalty
proposed by the voluntary disclosure examiner, the case will be referred to the
field for a complete examination. In that examination, normal statute of
limitations rules will apply. If no exception to the normal three-year statute
applies, the IRS will only be able to assess tax, penalty and interest for three
years. However, if the period of limitations was open because, for example, the
IRS can prove a substantial omission of gross income, six years of liability may
be assessed. Similarly, if there was a failure to file certain information returns,
such as Form 3520 or Form 5471, the statute of limitations will not have begun to
run. If the IRS can prove fraud, there is no statute of limitations for assessing
tax.

32. If a taxpayer's violation includes unreported individual foreign
accounts and business accounts (for an active business), does the 20
percent offshore penalty include the business accounts?
Yes. Assuming that there is unreported income with respect to all the accounts,
they all will be included in the penalty base. No distinction is to be drawn based
on whether the account is a business account or a savings or investment
account.

33. If the lookback period is 2003-2008, what does the taxpayer do if the
taxpayer held foreign real estate, sold it in 2002, and did not report the
gain on his 2002 return? Does the taxpayer compute the 20 percent
on the highest aggregate balance in 2003-2008? What, if anything,
does IRS expect the taxpayer to do with respect to 2002?
Gain realized on a foreign transaction occurring before 2003 does not need to be
included as part of the voluntary disclosure. If the proceeds of the transaction
were repatriated and were not offshore after January 1, 2003, they will not be
included in the base for the 20 percent offshore penalty. On the other hand, if
the proceeds remained offshore after January 1, 2003, and the income in the
account was not reported, they will be included in the base for the penalty.

34. If, after making a voluntary disclosure, a taxpayer disagrees with the
20 percent offshore penalty, what can the taxpayer do?
If any part of the penalty structure is unacceptable to a taxpayer, that case will
follow the standard audit process. All relevant years and issues will be subject to
a complete examination. At the conclusion of the examination, all applicable
penalties (including information return and FBAR penalties) will be imposed.
Those penalties could be substantially greater than the 20 percent penalty. If the
case is unagreed, the taxpayer will have recourse to Appeals.

35. Will examiners have any discretion to settle cases? For example, if a
penalty for failing to file a Form 5471 for 6 years is $10,000 per year,
will that be compared to 20 percent of the corporation’s asset value?
Would the lesser amount apply?

Voluntary disclosure examiners do not have discretion to settle cases for
amounts less than what is properly due and owing. These examiners will
compare the 20 percent offshore penalty to the total penalties that would
otherwise apply to a particular taxpayer. Under no circumstances will a taxpayer
be required to pay a penalty greater than what he would otherwise be liable for
under existing statutes. If the taxpayer disagrees with the IRS’s determination,
as set forth in the closing agreement, the taxpayer may request that the case be
referred for a standard examination of all relevant years and issues. At the
conclusion of this examination, all applicable penalties, including information
return penalties and FBAR penalties, will be imposed. If, after the standard
examination is concluded the case is closed unagreed, the taxpayer will have
recourse to Appeals. 

36. Re: FAQ 12 Does interest run on any of the penalties? If so, which
ones and from what date does interest accrue?

With regard to the accuracy-related and delinquency penalties, interest runs from
the due date of the return in question. With regard to all other penalties, interest
runs from the date of assessment of the penalty.

37. Re: FAQ 20 A taxpayer owns valuable land and artwork located in a
foreign jurisdiction. This property produces no income and there
were no reporting requirements regarding this property. Must the
taxpayer report the land and artwork and pay a 20 percent penalty?
FAQ 20 relates to income producing property for which no income was reported.
Under those circumstances, no distinction is made between assets held directly
and assets held through an entity in computing the 20 percent offshore penalty.
However, if the taxpayer owns nonincome producing property in the taxpayer’s
own name, there has been no U.S. taxable event and no reporting obligation to
disclose. The taxpayer will be required to report any current income from the
property or gain from its sale or other disposition at such time in the future as the
income is realized. Because there has as yet been no tax noncompliance, the 20
percent offshore penalty would not apply to those assets. If the foreign assets
were held in the name of an entity such as a trust or corporation, there would
have been an information return filing obligation that may need to be disclosed.

38. If a taxpayer transferred funds from one unreported foreign account to
another between 2003 and 2008, will he have to pay a 20 percent
offshore penalty on both accounts?

No. If the taxpayer can establish that funds were transferred from one account to
another, any duplication will be removed before calculating the 20 percent
penalty. However, the burden will be on the taxpayer to establish the extent of
the duplication.

39. How is the 20 percent offshore penalty computed if the taxpayer has
multiple accounts or entities where the highest value of some
accounts is not in the same year? Are separate penalties determined
at the rate of 20 percent for each account or entity value?

The values of accounts and other assets are aggregated for each year and the
penalty is calculated at 20 percent of the highest year‘s aggregate value.

40. A taxpayer has two offshore accounts. No FBARs were filed. The
taxpayer reported all income from one account but not the other.
Mechanically, how does the taxpayer report this? Does the taxpayer
report both accounts as a voluntary disclosure or bifurcate it into a
delinquent FBAR filing for the reported account and a voluntary
disclosure for the unreported account?

Because the annual FBAR requirement is to file a single report reporting all
foreign accounts meeting the reporting requirement, it is not possible to bifurcate
the corrected filing. The taxpayer should make a voluntary disclosure for the
omitted income and include the delinquent FBARs with respect to both accounts.
The account with no income tax issue is unrelated to the taxpayer’s tax
noncompliance, so no penalty will be imposed with respect to that account. S

41. If, in addition to other noncompliance, a taxpayer has failed to file an
FBAR to report an account over which the taxpayer has signature
authority but no beneficial interest (e.g., an account owned by his
employer), will that foreign account be included in the base for
calculating the taxpayer’s 20 percent offshore penalty?

No. The account on which the taxpayer has mere signature authority will be
treated as unrelated to the tax noncompliance the taxpayer is voluntarily
disclosing. The taxpayer may cure the FBAR delinquency for the account the
taxpayer does not own by filing the FBAR with an explanatory statement by
September 23, 2009. See FAQ 9. The answer might be different (1) if the
account over which the taxpayer has signature authority is held in the name of a
related person, such as a family member or a corporation controlled by the
taxpayer; (2) if the account is held in the name of a foreign corporation or trust for
which the taxpayer had a Title 26 reporting obligation; or (3) if the account was
related in some other way to the taxpayer’s tax noncompliance. In these cases,
the taxpayer will be liable for the 20 percent offshore penalty if there is
unreported income on the account. On the other hand, if there is no unreported
income with respect to the account, no penalty will be imposed under the
rationale see above # 40.

42. What about a taxpayer who only has delinquent
Form 5471s or Form 3520s but no tax due? Does that taxpayer fall
outside this voluntary disclosure process?

A taxpayer who has failed to file tax information returns, such as Form 5471 for
controlled foreign corporations (CFCs) or Form 3520 for foreign trusts but who
has reported and paid tax on all their taxable income with respect to all
transactions related to the CFCs or foreign trusts, should file delinquent
information returns with the appropriate service center according to the
instructions for the form and attach a statement explaining why the information
returns are filed late. (The Form 5471 should be submitted with an amended
return showing no change to income or tax liability.) Send copies of the
delinquent information returns, together with copies of tax returns for all relevant
years, by September 23, 2009, to the Philadelphia Offshore Identification Unit at:

Internal Revenue Service
11501 Roosevelt Blvd.
South Bldg., Room 2002
Philadelphia, PA 19154
Attn: Charlie Judge, Offshore Unit, DP S-611
The IRS will not impose a penalty for the failure to file the information returns.

43. Re: FAQ 9 A taxpayer recently learned that they have an FBAR filing
obligation but they do not have sufficient time to gather the
information necessary to properly file the FBAR by the June 30, 2009
due date. How should the taxpayer proceed?
Taxpayers who reported and paid tax on all their 2008 taxable income but only
recently learned of their FBAR filing obligation and have insufficient time to
gather the necessary information to complete the FBAR, should file the
delinquent FBAR report according to the instructions and attach a statement
explaining why the report is filed late. Send a copy of the delinquent FBAR,
together with a copy of the 2008 tax return, by September 23, 2009, to the
Philadelphia Offshore Identification Unit at the address in FAQ 9.
In this situation, the IRS will not impose a penalty for the failure to file the FBAR.
Additionally, if all 2008 taxable income with respect to a foreign financial account
is timely reported and a United States person only recently learned they have a
2008 FBAR obligation and there is insufficient time to gather the necessary
information to complete the FBAR, the United States person may follow the
procedures set forth above and no penalty will be imposed.
For 2008 tax returns due after September 23, 2009, the tax return does not need
to accompany the 2008 FBAR.

44. Re: FAQ 12 The due date for the 2008 FBAR is June 30, 2009. Should
a taxpayer file a 2008 FBAR in the normal manner or should a taxpayer
submit it with the voluntary disclosure request?
Except as described in FAQ 43, the taxpayer should timely file the 2008 FBAR in
the normal manner by the June 30, 2009 deadline and submit an additional copy
with the taxpayer's voluntary disclosure.
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Some taxpayers have made quiet disclosures by filing
amended returns. Will the IRS audit these taxpayers? If so, will they
be eligible for the 20 percent offshore penalty? Is the IRS really going
to prosecute someone who filed an amended return and correctly
reported all their income?

The IRS is reviewing amended returns and could select any amended return for
examination. If a return is selected for examination, the 20 percent offshore
penalty would not be available. When criminal behavior is evident and the
disclosure does not meet the requirements of a voluntary disclosure under IRM
9.5.11.9, the IRS may recommend criminal prosecution to the Department of
Justice. Taxpayers who have already made quiet disclosures but have not yet
been selected for examination may take advantage of the penalty framework
applicable to voluntary disclosure requests regarding unreported offshore
accounts and entities, provided they otherwise meet the criteria for voluntary
disclosure set forth in IRM 9.5.11.9. Those taxpayers must send previously
submitted documents, including copies of amended returns, to their local CI
office by September 23, 2009. See FAQs 4 and 10 for more information.

50. What is the distinction between filing amended returns to correct
errors and filing a voluntary disclosure?
An amended return is the proper vehicle to correct an error on a filed return,
whether a taxpayer receives a refund or owes additional tax. A voluntary
disclosure is a truthful, timely and complete communication to the IRS in which a
taxpayer shows a willingness to cooperate (and does in fact cooperate) with the
IRS in determining the taxpayer’s correct tax liability and makes arrangements in
good faith to fully pay that liability. Filing correct amended returns is normally a
part of the process of making a voluntary disclosure under IRM 9.5.11.9.
Taxpayers and practitioners trying to decide whether to simply file an amended
return with a Service Center or to make a formal voluntary disclosure under the
process described in IRM 9.5.11.9 and the March 23, 2009 memoranda should
consider the nature of the error they are trying to correct. Taxpayers with
undisclosed foreign accounts or entities should consider making a voluntary
disclosure because it enables them to become compliant, avoid substantial civil
penalties and generally eliminate the risk of criminal prosecution. Making a
voluntary disclosure also provides the opportunity to calculate, with a reasonable
degree of certainty, the total cost of resolving all offshore tax issues. It is
anticipated that the voluntary disclosure process is appropriate for most
taxpayers who have underreported their income with respect to offshore
accounts and assets. However, there will be some cases, such as where a
taxpayer has reported all income but failed to file the FBAR (FAQ 9), or only
failed to file information returns (FAQ 42), where it remains appropriate for the
taxpayer to simply file amended returns with the applicable Service Center (with
copies to the Philadelphia office listed in FAQ 9).

51. If the Service has served a John Doe summons seeking information
that may identify a taxpayer as holding an undisclosed foreign
account or undisclosed foreign entity, does that make the taxpayer
ineligible to make a voluntary disclosure in accordance with the March
23, 2009 guidance?
No. The mere fact that the Service served a John Doe summons does not make
every member of the John Doe class ineligible to participate. However, once the
Service obtains information under a John Doe summons that provides evidence
of a specific taxpayer’s noncompliance with the tax laws, that particular taxpayer
may become ineligible. For this reason, a taxpayer concerned that a party
served with a John Doe summons will provide information about them to the
Service should apply to make a voluntary disclosure as soon as possible.