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Increase in OVDI miscellaneous penalty

The miscellaneous penalty under the 2011 Offshore Voluntary Disclosure Initiative(OVDI), announced yesterday by the United States’Internal Revenue Service(IRS), has increased from 20 to 25 percent, impacting both Bahamians with dual U.S. citizenship and U.S. citizens with undisclosed accounts in The Bahamas.

The 2011 OVDI provides undisclosed offshore account holders with amnesty from criminal penalties for tax avoidance, but provides for steep penalties. International tax specialist Steven Cantor of Cantor&Webb, a Miami-based law firm, toldGuardian Businessyesterday that from his experience, some Bahamians with dual U.S. citizenship do not understand their reporting obligations and believe they are not subject to reporting requirements because of what they perceive as partial U.S. citizenship.

“I refer to that as being slightly pregnant,”he joked, but added,”Either you are or you aren’t a U.S. citizen.”According to him, U.S. citizens are subject to worldwide reporting and taxation with regard to bank accounts outside of the U.S.

The new OVDI will be available through August 31, 2011, but one difference between the 2011 and 2009 versions of the amnesty program is that this year the IRS will require complete and accurate U.S. federal income tax and informational returns for the 2003 to 2010 calender period by the deadline. The last amnesty program allowed for a letter to be submitted by October 15, 2009 for participation in the program, according to Webb.

Under the 2011 OVDI, taxpayers will need to report unreported income for the period beginning calender year 2003 to the end of 2010. The miscellaneous penalty, now at 25 percent, will apply to the largest aggregate account balance in a year within the 2003-2010 period.

For aggregate account balances not exceeding$75,000 in each of the years during the period, the balances are subject to a lesser 12.5 percent penalty. The aggregate balance calculation factors in fair market value for assets in undisclosed offshore entities. Foreign assets that were acquired with funds that were not properly taxed, or that resulted in improperly untaxed income, are also included in the aggregate account balance calculation.

One feature that was added late to the 2009 program is included in the new program: Alternative market-to-market calculations of income from investments in passive foreign investment companies, such as mutual funds and offshore hedge funds.

Taxpayers will be required to pay a 20%accuracy-related penalty on the full amount of the taxpayer’s underpayments for all years. They will also be required to pay a failure to file penalty and a failure to pay penalty if applicable, according to a release form Cantor Webb. This is in addition to paying the unreported tax, interest and the miscellaneous penalty.

Cantor, who is known by many in the Bahamian financial services industry and makes frequent trips here, said that persons with dual citizenship who have not properly reported would benefit from a degree of certainty if they participate in the OVDI, in addition to avoiding criminal penalties. They should pay very careful attention to the complete filing requirements for the August deadline.

“We have families in the Caribbean who have spent their whole life in a non-tax environment ignoring the fact that they were U.S. citizens, so in some instances the forensic work that needs to be done is substantial,”he said.

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