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IRS's Offshore Voluntary Disclosure Initiative Simplified by an Atlanta Tax Attorney

We recently published the following article on Knol.Google.com, visit our Knol profile for more OVDI tax help tips.

If you have had undeclared assets stashed offshore between 2003 and 2010, the Internal Revenue Service has opened a second limited window of amnesty to come clean. Well, amnesty may be too strong a word. There are still heavy penalties to pay, but they're not as egregious as they will be if the IRS kicks over your Cayman rock and finds your cash stash. In that case, criminal prosecution will be a distinct possibility.

According to their web site "The IRS is offering people with undisclosed income from offshore accounts an opportunity to participate in a new, voluntary disclosure initiative in order to get current on their tax returns. The 2011 Offshore Voluntary Disclosure Initiative (OVDI) will be available only through Aug. 31, 2011." That's right around the corner. If you can prove that you've made every effort to get your paperwork together by then, but need some extra time, you might be eligible for an extension.

If you can't get your stuff together by the end of the month, the IRS warns that taxpayers will "be liable for all applicable civil penalties, including the willful FBAR penalty. In addition, the civil resolution of their cases may extend to tax years prior to 2003." Further, you could be subject to criminal prosecution.

If you are casting about for the adult version of the-dog-ate-my-homework excuse, be warned that they are not accepting unfamiliarity with English as a reason for not coming clean. This time, press releases were distributed in nine different languages, including two versions of Chinese. They will also not cut you slack if you claim to be having trouble retrieving documents from overseas. The IRS web site says, "Our experience with offshore cases in recent years has shown that taxpayers are ultimately successful in retrieving copies of statements and other records from foreign banks."

The IRS offered an amnesty period a couple of years ago, but they still seem to feel that there are plenty of non-compliers out there. If you do decide to come forward this time, the process is complex and we recommend working with an experienced tax attorney. There is a ream of paperwork to fill out, including a worksheet where you get to figure out for yourself how much you owe them, which seems particularly cruel. There are 11 different kinds of penalties. They are heavier this time than last, and in some cases can total the majority of the money you're hiding.

On the other hand, if you don't turn yourself in and they catch you the IRS site warns, "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 whofails 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."

If you think you'd rather take your chances by staying underground, be warned. From their web site, "The IRS remains actively engaged in ferreting out the identities of those with undisclosed foreign accounts. Moreover, increasingly this information is available to the IRS under tax treaties, through submissions by whistleblowers, and will become more available as the Foreign Account Tax Compliance Act (FATCA) and Foreign Financial Asset Reporting (new IRC ยง 6038D) become effective." [They became effective in March, 2010.]

If the IRS is already investigating you for any reason, you are not eligible for this amnesty. Likewise, if you have tried to come clean by sneaking in an amended return, they do not consider you to be in compliance. Their web site reads, "The IRS has identified, and will continue to identify, amended tax returns reporting increases in income. The IRS will closely review these returns to determine whether enforcement action is appropriate...When criminal behavior is evident and the disclosure does not meet the requirements of a voluntary disclosure...the IRS may recommend criminal prosecution to the Department of Justice." You must submit the correct paperwork and pay all applicable penalties by August 31, 2011. A failure to do so comes with stiff consequences. "Those taxpayers making 'quiet' disclosures should be aware of the risk of being examined and potentially criminally prosecuted for all applicable years."

Speaking of paying the penalties, even if you don't have the money to pay them right now, the IRS is still eager to hear from you. The site says, "The terms of this initiative require the taxpayer to pay the tax, interest, and accuracy-related penalty, and, if applicable the failure to file and failure to pay penalties with their submission. However, it is possible for a taxpayer who is unable to make full payment of these amounts to request the IRS to consider other payment arrangements."

You may want to call them anonymously, or ask your tax attorney to do so on your behalf, but they warn against the potential for misunderstandings associated with hypothetical situations. If they catch up with you while the IRS is researching your hypothetical question, you will become ineligible for the 2011 Offshore Voluntary Disclosure Initiative.

The best thing to do if you have any questions with respect to your particular circumstances is to ask your trusted tax lawyer for advice. A trustworthy attorney will, in most cases, encourage you to come clean. Know that while they are on your side, they are also accountable to the IRS to remain a tax practitioner in good standing.

From the IRS's web site (edited for clarity and to cut to the chase): "The IRS anticipates that taxpayers will seek qualified tax and legal advice and representation...the practitioner must exercise due diligence in determining the correctness of any oral or written representations that the practitioner makes during the representation to the Department of the Treasury; and must avoid giving, or participating in giving, false or misleading information to the Department of the Treasury or giving a false or misleading opinion to the taxpayer. If the taxpayer decides not to make the voluntary disclosure...the practitioner...may not prepare the client's income tax return for that year without being in violation of Circular 230."

Ultimately, the decision to come clean is up to you. But remember, if you don't, it's a gamble. And most gamblers lose.

About Jeffrey S. Gartzman, Atlanta Tax Attorney and Certified Public Accountant
Jeffrey S. Gartzman is an accomplished Atlanta tax attorney and CPA who has been practicing tax law in Atlanta for nearly 30 years. He will help you resolve IRS and state tax problems, find tax relief and settle tax debt. Jeffrey S. Gartzman is a former IRS Taxpayer Education Program instructor. He is also an accredited Personal Financial Specialist with the American Institute of CPAs.

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