Making sure American-held accounts in foreign lands are taxed properly by the IRS is the focus of the 2011 Offshore Voluntary Disclosure Initiative. The deadline for American taxpayers to own up to accounts outside U.S. boundaries is Aug. 31.
Until the end of the month, the Internal Revenue Service will grant amnesty to taxpayers who report previously undisclosed foreign income and bank accounts by filing accurate returns. Amnesty does not absolve paying taxes or tax penalties that are owed. It does lessen the chances that any IRS charges, civil or criminal, will be filed.
The amnesty period also frees OVDI-participating taxpayers from more severe punishments that fall under the Report of Foreign Bank and Financial Accounts or FBAR.
Under OVDI, those taxpayers with $75,000 or more in foreign accounts will be charged a 25 percent penalty on the highest account balance between 2003 and 2010. For those with more modest foreign income, the rate drops to 12.5 percent.
OVDI was announced in early February. It is the second voluntary amnesty program the IRS has offered to get taxpayers with foreign money connections up-to-date with U.S. tax debts.
The initial voluntary disclosure program in 2009 was more forgiving than OVDI. It covered just six years of income and investments, instead of eight, and the penalty rate was 20 percent.
The latest IRS effort has left several confusing situations. The OVDI applies only to foreign investments. If a taxpayer wants to correct a domestic tax situation while also reporting the out-of-the-country income, OVDI does not apply.
The program also presents problems for people who became U.S. taxpayers after moving from another country. Investments that were made in a native land may now be subject to IRS penalties. Failing to report them could mean an IRS lawsuit and more severe implications than a 25 percent tax rate.
Source: Forbes, “Does IRS Amnesty Go Beyond Foreign Accounts?” Robert W. Wood, Aug. 10, 2011