The IRS/OVDI program requires:
1. Filing complete and accurate Form 1040(x) amended federal income tax returns for all tax returns covered by the voluntary disclosure, with applicable schedules detailing the type and amount of previously unreported income from the account or entity (Schedule B for interest and dividends, Schedule D for capital gains and losses, Schedule E for income from partnerships, S Corporations, estates or trusts and the years after 2010, Form 8538, Statement of Specified Foreign Financial Assets).
2. File Form TDF 90-22.1 (Report of Foreign Bank and Financial Accounts, “FBAR Filings”) for all tax years covered by the voluntary disclosure.
3. Cooperate in the voluntary disclosure process, including providing information on offshore financial accounts, institutions and facilitators and signing agreements to extend the period of time for assessing Title 26 liabilities and FBAR penalties.
4. Payment in full of tax, interest and penalties due. Penalties include:
Failure to File a Tax Return
(IRC Sec. 6651(a)(1), 5% of the tax due per month, up to 25% (tax due).
Failure to Pay Tax Due
Shown on Tax Return (IRC Sec. 6651(a)(2), 5% of the tax due shown on return, per month, up to 25% (tax due).
Accuracy Related Penalty (IRC Sec. 6662)
Taxpayer may be liable for a 20% or 40% penalty. Under the IRC Sec. 6662(b)(7) and (j), a 40% accuracy-related penalty is imposed for any underpayment of tax that is attributable to an undisclosed foreign financial asset understatement.
Title 26 Penalty
27.5% of highest aggregate balance in foreign bank accounting/entities, or value of foreign assets, during the period covered by the voluntary disclosure.
Total penalties up to 90% of unpaid tax plus 27.5% of value of assets (total): aggregated foreign accounts and foreign assets (for the highest year’s aggregate value during the period covered by the voluntary disclosure).
5. Execute a closing agreement on final return income covering specific matters, Form 906.
6. Agree to cooperate with IRS offshore enforcement effected by providing information about offshore financial institutions, offshore service providers, and other facilitators.
Civil Fraud/Criminal Tax Evasion
Until such time as the U.S. taxpayer and the IRS execute a Form 906 closing agreement, the U.S. taxpayer may be still subject to both imposition of civil tax fraud penalties and prosecution for criminal tax evasion, if and when the IRS “disqualifies the U.S. Taxpayer” from the IRS/OVDI (2012) (as is the case with Israel’s Bank Leumi’s U.S. clients).
Civil Tax Fraud
Civil fraud penalties imposed under IRC Sec. 6651(f) or 6663, for either as underpayment of tax, or a failure to file a tax return due to fraud, the taxpayer is liable for penalties of 75% of the unpaid tax.
Criminal Tax Evasion
U.S. taxpayers with undisclosed offshore bank accounts and unreported income face criminal charges for:
1. Tax Evasion (26 USC Sec. 7201) [5 years in jail; $250,000 fine];
2. Filing False Tax Return (26 USC Sec. 7206(1)) [3 years in jail, $250,000 fine];
3. Failure to File Tax Return (26 USC Sec. 7203); [1 year in jail, $100,000 fine];
4. Willful Failure to File FBAR or Filing False FBAR (31 USC Sec. 5322) [10 years in jail, fines up to $500,000].
In addition, the willful failure to file the FBAR has a civil penalty as high as the greater of $100,000 or 50% of the total balance of the foreign account per violation (31 USC Sec. 5321(a)(5).