Tax Hotline March 02, 2011

A 2nd opportunity to come clean

The Internal Revenue Service of the U.S. (‘IRS’) has, for the second time in 2 years, announced an amnesty program for U.S. persons with undisclosed foreign accounts or entities. This presents a huge opportunity to all Non-resident Indian persons (NRIs) who are residing/ domiciled in the U.S. and who have Indian and non-U.S. bank accounts and assets in their names. These assets, whether income yielding or not, may have been acquired before or during U.S. residency or received as gift or inheritance.

Whilst most may have not reported/ disclosed these assets (and income thereon) merely because of non-awareness of reporting obligations, fear of prosecution, heavy penalties and criminal proceedings may also have been the reason for the hesitation to report it later. This opportunity has been offered to all such persons for cleaning up their act and getting their taxes in order.

The Scheme and its offerings

The IRS has announced a special voluntary disclosure initiative for the residents of the U.S. to make a disclosure of all their offshore accounts and assets by paying a fixed penalty. This initiative has been introduced with the main purpose of bringing offshore money back into the U.S. tax system and helping U.S. residents to clean up their tax affairs.

The initiative (after the 2009 Offshore Voluntary Disclosure Program) is called the 2011 Offshore Voluntary Disclosure Initiative (OVDI), which will be available through August 31, 2011. Under this initiative, U.S. taxpayers are required to revise their federal tax returns from 2003-2010 to report any omitted income, pay back taxes and interest for the past eight years and accuracy-related and/or delinquency penalties. In addition, U.S. persons participating in OVDI will face a 25 percent penalty on the highest account balance in the past eight years, but taxpayers in limited situations can qualify for a reduced 5 percent penalty. The IRS has also created a new penalty category of 12.5 percent for smaller offshore accounts. People whose offshore accounts or assets did not surpass $75,000 in any calendar year covered by the 2011 OVDI will qualify for this lower rate. U.S. persons who have already participated in the 2009 scheme can request for their cases to be reviewed under the 2011 OVDI reduced 5 percent or 12.5 percent penalty framework.

U.S. taxpayers with undisclosed foreign accounts or entities, who had missed out on the 2009 Offshore Voluntary Disclosure Program, have been given a second chance to participate in a formal voluntary disclosure program which offers certainty on how their case will be handled. Participants who made "quiet disclosure" by filing amended returns and paying back taxes and interest without otherwise notifying the IRS, or those who are participating in the IRS informal voluntary disclosure program. are eligible to participate in the 2011 OVDI; however, those that are participating in the 2009 Offshore Voluntary Disclosure Program are not eligible.

The IRS, which is known for being very strict, has offered the opportunity to all such U.S. persons to become compliant, avoid substantial civil penalties and generally eliminate the risk of criminal prosecution. The IRS remains actively engaged in ferreting out the identities of those with undisclosed foreign accounts under tax treaties, through submissions by whistleblowers, and through the recently enacted Foreign Account Tax Compliance Act (FATCA) provisions which, among other things, increase transparency by creating additional reporting for certain categories of foreign assets.

A second chance to redeem oneself of the errors made is rarely given. With the IRS cracking its whip and leaving no stones unturned to catch defaulters, it is not difficult to make a choice on which side to cross over to.

The India Story

A strong suggestion is also being made in the Indian context to introduce an amnesty scheme for all such Indian residents who have undisclosed offshore accounts and income taking a leaf out of this initiative undertaken by the U.S. revenue authorities.

Will Indian authorities introduce the same and be successful at it will remain to be seen.

*Please note that this Hotline is purely for informational purposes and does not constitute legal advice. Nishith Desai Associates is qualified to practice only Indian laws. We request you to consult a qualified U.S. attorney for obtaining any advice in this regard.

International Wealth and Succession Planning Team

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