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Tax News
The 2011 Offshore Voluntary Disclosure Initiative (OVDI) is Official
February 11, 2011
Administrative Actions
I mentioned several times on this blog that a new program was pretty much in the cards. Few days ago the Government went on the record and announced the new OVDI. The IRS issued press release IR-2011-14 (Feb. 8, 2011) which summarizes the highlights of the program and also links to a more detailed Q&A. The press release can be found here and the Q&A could be found here. As suggested by the IRS previously, the new program has stiffer penalty rules. OVDI requires individuals to pay a penalty of 25% of the amount in the foreign bank accounts in the year with the highest aggregate account balance covering the 2003 to 2010 time period. There are reduced penalties for some eligible taxpayer of 5 or 12.5%. Taxpayers will also have to pay back-taxes and interest for up to 8 years.  All of this is obviously more stringent compared to the 2009 program’s 20% penalty and 6 year look-back (2003-2008).  Taxpayers will have to enroll in the program by August 31st in order to be able to benefit from the potential avoidance of criminal liability and higher civil penalties.

Could investors in private equity, venture capital and hedge fund be able to benefit from the program? Well, in my previous post on this issue I reasoned that it boils down to FBARs and since the IRS recently offered administrative FBAR relief in Notice 2010-23 for hedge funds and private equity funds, I alluded that the program does not have much to do with these types of fund investors (contrary to say, mutual fund investors who had to file FBARs all along).  Why are FBARs such a big part of the program?  Well, the penalty for filing the FBAR could be up to 50% of the value of the account.  Enrolling in the program could significantly reduce those penalties and in addition possibly mitigate criminal exposure.  Could there be instances where the program could benefit non-mutual fund investors such as hedge fund or private equity fund investors aside from any FBAR considerations? Sure.  Envision the following scenario.  U.S. investor invests in an offshore hedge fund treated as a PFIC. Investor never receives PFIC information statements and never makes a QEF election.  However, investor receives sporadic distributions from the fund. Generally the investor is required to file Form 8621 and determine its excess distribution tax (if any).  Investor’s advisor tells investor about all of this at some point, and discusses interest charges, possible forfeiture of capital gain rates etc. Investor, however, chooses to disregard the form and just treats the distributions as return of capital or reports them as capital gains. Could such a hedge fund investor be a candidate for the program?  Possibly, yes. At least in my view, the hard point the IRS is trying to drive home with the previous, and this new voluntary disclosure program, is that if taxpayers have anything that is not in order with their offshore account and activities (other than instances where they paid all the required federal income tax but they failed to file some form for whatever reason), taxpayers should strongly consider the program. Obviously, that’s a choice every taxpayer should decide based on its own circumstances, hopefully with the help of a competent advisor.
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Tags: funds voluntary disclosure, OVDI, Voluntary Disclosure