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Voluntary Disclosure of Offshore Accounts

Client Advisory

March 27, 2009

The Internal Revenue Service announced on March 26 a new initiative under which it would be lenient in assessing penalties if a US person now voluntarily discloses a previously unreported foreign bank or brokerage account, and the income therefrom.

Under US tax law, a US citizen or resident is required to report on his annual tax return income from all sources, whether domestic or foreign. This of course includes income from offshore financial accounts that the US taxpayer beneficially owns. Failure to report such income implicates all the usual civil tax penalties. In addition, any US person who has a financial interest in or authority over a non-US account(s) in excess of $10,000 is required to file an annual Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (“FBAR”). The potential penalties for failure to file an FBAR can be very significant, especially if the failure is considered “willful.” Finally, of course, there are potential criminal sanctions for violations of US law.

The IRS is offering to limit the penalties on US persons who voluntarily disclose previously unreported accounts. Many US persons are already motivated to do so as a result (inter alia) of recent aggressive actions by the US Treasury and the apparent erosion of Swiss and other national bank secrecy laws. Under the new IRS program, a voluntary disclosure will initially be screened by the IRS Criminal Investigation unit to make sure that the taxpayer is not ineligible for the voluntary program, because (for example) the IRS has already initiated a civil examination or criminal investigation of the taxpayer, or has received information from a third party alerting the IRS to the specific taxpayer’s noncompliance. If the taxpayer is eligible, then the disclosure will be sent to the Philadelphia Offshore Identification Unit for civil processing and assessment of penalties in accordance with the new guidelines.

In general, the IRS will require payment of taxes and interest for the past six years. In addition, for each such year, the IRS will assess either an accuracy penalty (20% of the tax attributable to the omitted income) or a delinquency penalty (up to 25% of the tax underpayment, depending upon the duration of the underpayment). Finally, and perhaps most significantly, in lieu of potentially greater FBAR penalties, the IRS will require forfeiture of 20% of the amount in the account, based upon highest value during the six-year period. This penalty will be reduced to 5% in the (relatively rare) circumstances where the taxpayer did not open the account, there was no account activity while the taxpayer controlled the account, and all US taxes have been paid on the account. Under the program, of course, there would be no criminal prosecution. The program is scheduled to expire in six months, after which time the IRS is threatening to treat violators more harshly.


Questions regarding this advisory should be addressed to Howard J. Barnet, Jr. (212-238-8606, barnet@clm.com) or Robert A. McTamaney (212-238-8711, mctamaney@clm.com).

Carter Ledyard & Milburn LLP uses Client Advisories to inform clients and other interested parties of noteworthy issues, decisions and legislation which may affect them or their businesses. A Client Advisory does not constitute legal advice or an opinion. This document was not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. © 2017 Carter Ledyard & Milburn LLP.
© Copyright 2009

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