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The IRS voluntary disclosure program for unreported foreign income

In 2009 and 2010, the IRS offered a limited amnesty voluntary disclosure program for taxpayers with unreported foreign income. This program was designed to encourage taxpayers with unreported foreign income to disclose the information voluntarily and come back into the system. In exchange for the voluntary disclosure of this information, the IRS would not subject the taxpayers to criminal and civil fraud penalties. More than 15,000 individuals took advantage of this limited amnesty voluntary disclosure program. However, the limited amnesty voluntary disclosure program has now ended.

The IRS continues to crack down on taxpayers that fail to file the required information and income tax reporting forms for foreign income and assets. These reporting requirements not only include taxpayers that have foreign bank accounts in their name, but also taxpayers with inherited accounts, beneficiaries of foreign trusts, and other foreign ownership situations.

While the limited amnesty voluntary disclosure program did not grant full amnesty for taxpayers who had unreported foreign income, it did grant a limited amnesty with a calculable solution to the reporting penalties amount and a possible last chance to avoid criminal prosecution. Now that the program has ended, taxpayers may still apply under the traditional voluntary disclosure program of the IRS in order to come back into the system and potentially eliminate the possibility of criminal prosecution. The traditional voluntary disclosure program does not provide the limited civil fraud penalties that were available under the limited amnesty voluntary disclosure program, but the IRS leans towards not pursuing criminal prosecution for taxpayers that comply with the traditional voluntary disclosure program.

Recently, however, the IRS has announced a second limited amnesty voluntary disclosure program for tax years between 2003-2010. The terms of the second limited amnesty voluntary disclosure program are similar to those of the first settlement offer, but the penalty structure is different. The general rule is that the penalty is 25% based on amounts in foreign bank accounts, but it can be as low as 12.5% or 5% for some taxpayers. The second limited amnesty voluntary disclosure program is scheduled to end on August 31, 2011.

If you have any unreported foreign income it is important to consult a tax professional to determine whether you may qualify for the voluntary disclosure program and what steps should be taken to minimize penalties and potential criminal prosecution.

(Updated June 2011)