Deadline Looms for Disclosure of Offshore Accounts

September 8, 2009Articles The Legal Intelligencer

The Voluntary Disclosure Practice, or VDP, for any taxpayer who has a previously undisclosed and untaxed interest in a foreign account or entity is set to expire Sept. 23. The VDP provides taxpayers with a procedure pursuant to which they can make a voluntary disclosure of their direct or beneficial interest in a foreign account or entity so that they may become compliant with all federal tax and reporting requirements, avoid substantial civil penalties and generally eliminate the risk of criminal prosecution. The VDP is applicable to any individual, corporation, partnership, trust or other entity that is otherwise obligated to report and pay taxes on income earned on financial accounts maintained in foreign countries, either directly or through controlled foreign entities. The term "financial accounts" is broadly defined and includes most bank, brokerage and investment accounts.

The details of the VDP are contained in a variety of IRS releases including a "Frequently Asked Questions" document issued by the IRS and available at www.irs.gov. Taxpayers with questions about the VDP may also call the IRS Voluntary Disclosure Hotline at 215-516-4777.

There is no pre-set form for making the required disclosure under the VDP. However, the IRS has issued a sample disclosure letter, which requires the taxpayer to provide personal information (name, address, date of birth, Social Security number and passport number), the source of the funds in the foreign account, the highest aggregate value of the foreign account for the six-year period of 2003-08 and the estimated total unreported income for each of those years. In addition, the letter requires disclosure of where the accounts are held, the purpose for establishing the account and the identity of every person or entity affiliated with the account. All of the information provided must be submitted under penalty of perjury. An attorney or other tax professional may make the VDP submission on behalf of a taxpayer provided that the submission is accompanied by a valid power-of-attorney (Form 2848) executed by the taxpayer.

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