Offshore Voluntary Disclosure Initiative

By Mary Lou Gervie, CPA, CFE, CFF, Bethesda, MD

Editor: Valrie Chambers, Ph.D., CPA

On February 8, the IRS announced another special voluntary disclosure initiative designed to bring U.S. persons hiding assets offshore back into the U.S. tax system (IR-2011-14). This is potentially good news for those taxpayers who did not know about the first two initiatives, but the penalties associated with the disclosure are higher and the terms slightly different. This new initiative, the 2011 Offshore Voluntary Disclosure Initiative (2011 OVDI), will be available only through August 31, 2011. This item discusses some of the history related to the IRS effort to bring U.S. persons into compliance.

U.S. persons (individuals, corporations, partnerships, limited liability companies, and trusts) are required to report the income earned from investments held in foreign financial accounts. Any persons who have a financial interest in or signatory authority over any financial account or accounts, if the aggregate value of the accounts at any time during the year exceeds $10,000, must file Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (FBAR) (rev. October 2008). The penalties for failure to comply with the reporting and filing requirements are steep; the failure to check the box “yes” for disclosing foreign accounts on an individual tax return, Schedule B, is a potential felony. Therefore, taking advantage of the IRS’s compliance programs avoids possible prosecution.

In addition, with the IRS currently implementing the Foreign Account Tax Compliance Act (FATCA), which was enacted as part of the Hiring Incentives to Restore Employment (HIRE) Act, P.L. 111-147, in 2010, Congress has provided the IRS with more transparency and better tools to track down Americans with offshore assets. Beginning with the 2011 tax year (for years beginning after March 18, 2010), in addition to the FBAR reporting requirements, U.S. individuals holding specified foreign assets with an aggregate value of all assets exceeding $50,000 will be required to file Form 8938, Statement of Foreign Financial Assets, with their tax return.

The IRS initiated the first offshore voluntary compliance program in 2003. Called the Last Chance Compliance Initiative, it resulted in very few individuals entering the program because there was little incentive to disclose offshore investments. The second initiative, which started in March 2009, was spiced with an added incentive for individuals to come forward based upon the August 2009 agreement between the United States and Switzerland to disclose the names of some of UBS AG’s U.S. investors. The IRS and the Department of Justice Tax Division stated that they would prosecute investors with UBS accounts in Switzerland who did not enter into the 2009 Offshore Voluntary Disclosure Initiative (2009 OVDI) before they received notification from the IRS that they were under investigation.

One of these investors did plead guilty to tax evasion for the failure to report his income from foreign investments but was found not guilty for the willful failure to report his interest in the offshore bank accounts on the FBAR form. In this district court case, Williams, No. 1:09-cv-437 (E.D. Va. 9/1/10), the government had previous knowledge of the foreign bank accounts and had frozen the accounts; therefore, the failure to check the box on Form 1040, Schedule B, Part III, Foreign and Accounts and Trusts, and the failure to timely file the FBAR form was determined not to be a willful failure because the government already knew about them.

The 2009 OVDI ended on October 15, 2009. According to IRS Commissioner Douglas Shulman, the IRS received disclosures of approximately 15,000 taxpayer participants. During this time frame, the IRS discovered numerous other schemes and promoters in many foreign countries, not just UBS account holders.

The IRS Criminal Investigation Division worked with IRS management to develop a settlement in connection with the 2009 OVDI for taxpayers to pay back taxes and interest for six years (2003–2008) and agree to a 20% understatement penalty on the tax and a 20% penalty (reduced to 5% in certain very limited circumstances) based on the highest aggregate balance of their foreign accounts during that six-year period. This agreement was in lieu of all other penalties that the IRS could have assessed in its normal voluntary disclosure program (i.e., civil fraud penalties, FBAR penalties, Form 5320 penalties), which could possibly result in the confiscation of the entire foreign account(s).

The 2011 OVDI increased the penalty on the aggregate account balance to 25% and extended the number of years from six to eight, starting with 2003 and ending in 2010. The 25% penalty is reduced to 5% or 12.5% in limited circumstances. If the offshore accounts or assets do not exceed $75,000 in any calendar year, the 12.5% penalty might apply. The 20% accuracy-related penalty or the failure to file and pay penalties, if applicable, will be applied to the underpayment of tax for all years. Plus, interest will run on the tax and accuracy-related penalty from the due date of the return.

The 2009 OVDI appeared simple in concept, but the IRS had a bit of a bumpy road in implementing the program. Different procedures had to be worked out and changed and then changed again. Most of these changes have been implemented in the 2011 OVDI:

  • Requiring powers of attorney with specified requirements;
  • Requiring extensions of the civil statute of limitation on Form 872, Consent to Extend the Time to Assess Tax;
  • Demanding the prompt filing of amended returns and FBARs (the 2011 OVDI requires all forms to be filed by August 31, 2011); and
  • Mark-to-market computations as an alternative to the statutory PFIC computations with a 20% tax rate on the gains and a 7% interest charge on the 2003 tax from that gain.

The IRS assigned revenue agents without previous training in international tax issues to the 2009 OVDI. The rules relating to passive foreign investment companies (PFIC) became one of the biggest headaches for both agents and practitioners. Many of the foreign bankers invested taxpayer money in foreign mutual funds, which reinvested the capital gains back into the funds. The PFIC rules relating to throwback interest computations on this income made it difficult, if not impossible, to calculate due to the lack of historical information. The IRS did adopt a modified mark-to-market method, which simplified the requirements. For any PFIC investment retained beyond December 31, 2010, the taxpayer must continue using the mark-to-market method but will apply the normal statutory rules of Sec. 1296 as well as the provisions of Secs. 1291–1298, as applicable.

It is interesting that the IRS has started yet another OVDI program. Historically, some taxpayers with offshore accounts filed amended tax returns that included previously unreported income in a “quiet” disclosure. Under this method, the IRS did not assess penalties, and only the tax and interest were due with the filings. If the taxpayer made a “noisy” voluntary disclosure through the IRS Criminal Investigation Division, there was typically a civil audit, and fraud penalties might be assessed. Now the IRS warns professionals that a quiet voluntary disclosure will no longer be acceptable. Taxpayers who have already made a quiet disclosure are eligible for the 2011 OVDI.

In the meantime, countries that previously guarded their bank secrecy rules are entering into mutual assistance agreements and exchanging information with the United States much more rapidly than in the past. Commissioner Shulman warned taxpayers that the IRS is not letting up on the international tax issues and that the risk of getting caught will only increase. Professionals need to make sure their clients are filing in conformity with the rules and specifically making inquiries regarding offshore accounts or investments.


Valrie Chambers is a professor of accounting at Texas A&M University–Corpus Christi in Corpus Christi, TX. Mary Lou Gervie is with Watkins, Meegan, Drury & Company, L.L.C., in Bethesda, MD. Both are members of the AICPA Tax Division’s IRS Practice and Procedures Committee. For more information about this column, contact Prof. Chambers at

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