Thursday, February 24, 2011

U.S. Tax Authorities Announce a Second Tax Amnesty Program


On February 8, 2011, the United States’ Internal Revenue Service (the “IRS”) announced a tax amnesty program for U.S. taxpayers with unreported foreign accounts. To avoid prosecution by US authorities for failing to pay taxes on unreported foreign accounts, those seeking to take advantage of this program must file all necessary paperwork and pay the required taxes, interest, and penalties by August 31, 2011. The amnesty comes about just as foreign banks are getting acquainted with a new U.S. law requiring them to disclose to the IRS certain information regarding U.S. depositors.

The current program is the sequel to the 2009 tax amnesty. During the 2009 initiative, which ran from March to October, more than 15,000 U.S. taxpayers voluntarily disclosed information regarding their secret foreign accounts. Since the Service had only anticipated around 1,000 filings, the 2009 amnesty was a huge success. Even though the IRS has closed only 2,000 of the 15,000 cases, to date the 2009 initiative has generated approximately $400 million in revenue.

The 2009 and the 2011 amnesty programs have similar provisions, but the latter dictates harsher treatment for U.S. taxpayers with undisclosed offshore accounts. While the 2009 program imposed a penalty of 20 percent on the offshore account balance, its 2011 counterpart prescribes a 25-percent penalty. Additionally, the 2011 amnesty requires that U.S. taxpayers with unreported foreign accounts file tax returns for the past eight, rather than six years, as mandated by the 2009 initiative. The current amnesty program has some distinct features, however. For example, the IRS implemented a reduced 12.5-percent penalty for accounts worth less than $75,000 and a 5-percent penalty in some limited situations, such as those involving inherited accounts.

Despite its high penalties, the 2011 amnesty benefits U.S. taxpayers with secret foreign accounts by allowing them to avoid criminal charges. Though escaping prosecution comes at a high cost, this is probably the last amnesty program before new offshore bank reporting regulations go into effect on January 1, 2013. These new regulations will make hiding offshore accounts virtually impossible. Therefore, in the words of IRS Commissioner Douglas Shulman, the 2011 amnesty program is the “last, best chance” for U.S. taxpayers with unreported offshore accounts to avoid criminal prosecution and potential prison sentences.

Discussion Questions:
1. Is there a relationship between the 2009 and 2011 tax amnesty programs and the decline in tax revenues as a result of the most recent financial crisis?
2. In 2010, Congress passed a law requiring foreign banks to provide information regarding those account holders who may owe taxes to the U.S. government. The international banking community and several foreign governments have openly criticized the law. Should the U.S. government yield to this international pressure and revise or repeal the law?

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