Offshore Voluntary Compliance Initiative

    January 14th the IRS and Treasury Department announced the Offshore Voluntary Compliance Initiative (OVCI), a new initiative offering partial amnesty to taxpayers who maintain offshore financial accounts including offshore credit, debit or other payment cards issued by offshore banks.

   Under OVCI, Taxpayers who disclose their offshore holdings by April 15, 2003 will avoid criminal prosecution as well as an imposition of the civil fraud penalty; they will, however, still be subject to payment of back taxes, interest and certain accuracy or delinquency penalties. 


   Eligibility:

  Taxpayers apply for the OVCI and will be notified within 30 days of their eligibility.  Once eligible, taxpayers will have another 150 days to prepare and file amended tax returns to correctly state their income.  In addition, taxpayers must provide detailed information on the promoters and schemes involved with their offshore accounts, as well as financial records.  Taxpayers will need to pay their taxes in full or arrange for installment payments of the tax liability (if they qualify).

    Taxpayers who are rejected are probably already under civil or criminal investigation and thus ineligible for OVCI,  In addition,  those who promote illegal offshore accounts or are involved in criminal activity, outside of not reporting offshore accounts, are disqualified.


Risk of Not Coming Forward: 

   IRS warns that if taxpayers do not voluntarily come forward and they are later identified as participating in an offshore tax evasion scheme, they will be ineligible for amnesty and could face criminal prosecution.  Thus, there is tremendous pressure for taxpayers hiding their income in offshore accounts to come forward under OVCI, since it takes just one participant to provide information necessary for IRS to identify all the taxpayers and promoters involved in a particular scheme.  Clearly, the odds of detection and criminal prosecution will skyrocket after the amnesty period expires.

    IRS criminal division notes that taxpayers who fail to take advantage of  OVCI, still should consider coming forward voluntarily because such conduct is considered a mitigating factor in a potential criminal prosecution.


 Background - The "John Doe" Summons Investigation

            OVCI is the outgrowth of the “John Doe” summons investigation, which took place over the past two years and is still ongoing, wherein IRS issued a series of summonses to obtain information regarding U.S citizens holding payment cards emanating from offshore banks.  While it is not illegal to hold credit or debit cards issued by offshore banks, often these cards are used to access funds held in tax-haven countries outside the reach of IRS. 

            This investigation produced thousands of accounts with several dozen cases being referred to the Criminal Investigation Division.  IRS estimates that more than one million taxpayers are participating is these accounts to avoid taxation.  To date, 170,000 have been reported to IRS, suggesting annual tax revenue losses in the billions of dollars.


Off-Shore Accounts and Tax Evasion

    Those with offshore bank accounts holding unreported income may want to take advantage of the OVIC, even though the income was earned many years ago.  Normally, the crime of tax evasion, a felony punishable by up to 10 years in prison and a $100,000 fine or both, has a six-year statute of limitations.  This means the government must prosecute a taxpayer within 6 years from the date the crime was committed.  However, if the crime of tax evasion occurs, and the taxpayer places the funds in a foreign account and then fails to report the foreign account on his or her tax returns (Form 1040, Schedule B, Part III), the taxpayer is continuing to commit tax evasion by filing false tax returns and the statute of limitations is tolled until the "last affirmative act" of tax evasion is longer than six years.

    The lesson:  If you commit tax evasion, do not stuff the income in a foreign bank account and fail to report it.  If you are in this situation, strongly consider (with the advise of an experienced tax attorney) whether you should participate in the OVIC.