U.S. Clarifies Offshore Voluntary Compliance Initiative

On March 17, 2003, the Internal Revenue Service (IRS) provided new information to clarity its Offshore Voluntary Compliance Initiative (OVCI), including the relevance of international cooperation initiatives. On December 11, 2003, the IRS issued Revenue Procedures 2003-11 known as the OVCI. Under the OVCI the IRS will not impose a number of civil and criminal penalties. The taxpayer must apply by April 15, 2003, and give complete information about how he was introduced to the account or arrangement, information about any promoter or other person involved, etc. The taxpayer must provide detailed information about the source of any foreign funds, assets, or investments, descriptions of entities used, and fully pay the tax liabilities and interest or make “other financial arrangements” that are acceptable to the IRS. The IRS clarified the broad scope of the types of activities included in the term “offshore financial arrangements”to which te OVCI applies. Such arrangement is “any financial arrangement with a foreign bank, financial institution, corporation, partnership, trust, or other entity, and would include the entire range of activities from a simple offshore bank account in the taxpayer’s own name to a complex, ‘tiered’ arrangement of trusts, partnerships and international business companies with nominee ownership. The key for purposes of OVCI is that IRS is only interested in such arrangements if they were not properly reported for the U.S. tax purpose”. While the IRS has not made any arrangements with foreign governments about potential cooperation with this matter, tax treaties require the IRS and the U.S. treaty partners to respond to specific requests from a treaty partner who has an open tax investigation of the taxpayer in question, as well as to make spontaneous exchanges of information where the tax authority has an indication of non-compliance with the treaty partner’s tax law. The IRS has advised that individuals wanting to resolve offshore tax problems to request participation in OVCI to reduce their risk of discovery and loss of eligibility.