IRS announces settlement offer for those that voluntarily disclose unreported offshore income

by Steven M. Appel

In a March 26 statement on offshore income, IRS Commissioner Doug Shulman announced what amounts to settlement terms for taxpayers who voluntarily and timely disclose unreported offshore income. Taxpayers who come in voluntarily will get what the Commissioner called a "fair settlement". The settlement terms include the requirement to pay back-taxes and interest for six years, and pay either an accuracy or delinquency penalty on all six years. They will also pay a penalty of 20% of the amount in the foreign bank accounts in the year with the highest aggregate account or asset value. To be clear, that is 20% of the highest asset value of an account anytime in the past six years. This gives taxpayers and tax practitioners, in the words of the Commissioner, "certainty and consistency" in how their case will be handled. Those who come forward voluntarily will pay back taxes, interest and a significant penalty but can avoid criminal prosecution.

In a memorandum from Linda E. Stiff, Deputy Commissioner for Services and Enforcement addressed to the Commissioners for the Large and Mid-Size (LMSB) and Small Business/Self-Employed (SBSE) Divisions, agents are authorized to resolve tax liabilities related to offshore issues of taxpayers that make voluntary disclosure requests in the following manner:

1. Assess all taxes and interest due going back 6 years;
2. Require taxpayers to file or amend all returns and the FBAR;
3. Assess either an accuracy or delinquency penalty for all years (no reasonable cause exception will be applied); and
4. In lieu of all other penalties that may apply (including FBAR and information return penalties), assess a penalty equal to 20% of the amount in foreign bank accounts/entities in the year with the highest aggregate account/asset value. The penalty is reduced to 5% if:
   1. The taxpayer did not open or cause any account to be opened or formed;
   2. There has been no activity in any account or entity (no deposits, withdrawals, etc) during the period the account/entity was controlled by the taxpayer; and
   3. All applicable U.S. taxes have been paid on the funds in the account/entity (where only the earnings have escaped U.S. taxation).

The terms will remain in effect only for six months from the date of Stiff's memorandum, March 23.

While providing guidance on the settlement terms, the IRS at the same time provided guidance to agents who have cases of unreported offshore income when the taxpayer did not voluntarily disclose offshore income. They have been instructed to fully develop those cases and to pursue both civil and criminal avenues, and consider all available penalties, including the maximum penalty for the willful failure to file Form TD F 90-22.1 (the Report of Foreign Bank and Financial Accounts, commonly known as the "FBAR") and the fraud penalty. The FBAR is required to be filed by a US person who has a financial interest in or signature or other authority over any foreign financial accounts, including bank, securities, or other types of financial accounts, in a foreign country if the aggregate value of the accounts exceeds $10,000 at any time during the calendar year. The FBAR is due on or before June 30 of the succeeding year. Civil and criminal penalties, including in certain circumstances a fine of up to $500,000 and imprisonment of up to five years are provided for the failure to file the report, supply information, and for filing a false or fraudulent report.