On February 8, 2011 the Internal Revenue Service (IRS) announced a new Offshore Voluntary Disclosure Initiative (OVDI). This is in addition to the 2009 Offshore Voluntary Disclosure Program (OVDP) that closed on October 15, 2009. Nearly 15,000 taxpayers took advantage of the 2009 OVDP and nearly 3,000 taxpayers came forward after the 2009 OVDP closed on October 15, 2009.

The current 2011 OVDI provides taxpayers who failed to disclose income from offshore accounts an opportunity to come forward and comply with their U.S. income tax and offshore disclosure obligations for tax years 2003 through 2010. If the taxpayer cooperates fully, the IRS states that it will not recommend criminal prosecution to the United States Department of Justice.

• Observation: The Department of Justice has the authority to prosecute taxpayers even if the IRS does NOT recommend prosecution. Therefore, taxpayers will also want to confirm that the Department of Justice does NOT intend to prosecute before the taxpayer provides the IRS with incriminating information.

Not everyone is eligible to participate in the 2011 OVDI. Only taxpayers who failed to report their offshore income correctly and failed to file the required offshore disclosure forms (such as the FBAR) may participate in the 2011 OVDI. Taxpayers who have reported their offshore income correctly are not eligible to participate. They may be able to avoid all civil penalties if they file the late offshore disclosure forms by the August 31, 2011 deadline. (The deadline is June 30, 2011 for the 2010 FBARs).

In order to participate in the 2011 OVDI, a taxpayer must accomplish the following before August 31, 2011:

• File original or amended income tax returns for the years 2003 through 2010.
• File original or amended FBARs and other offshore disclosure forms for the years 2003 through 2010.
• Pay or arrange for payment of the additional tax, penalties and interest, including the penalties for failure to timely file the FBARs.

Those who are unable to complete all of the above tasks by August 31, 2011 may come forward voluntarily after the August 31, 2011 deadline. These tardy taxpayers will be subject to the “normal” IRS voluntary disclosure procedures. Thus, they may be able to avoid criminal prosecution if they cooperate fully with the IRS. The IRS nevertheless promises that these tardy taxpayers will experience more severe civil penalties. The IRS also reserves the right to examine their taxable years before 2003 as a quid pro quo for NOT recommending criminal prosecution.