Why Investment Properties (Rentals) Should Be Placed In LLCs

Prepared By: Melissa C. Marsh, Los Angeles Real Estate Attorney

The California LLC is probably the least understood entity, but it’s the best entity to hold ownership to real estate investment property (rental property) because of the asset protection it provides and the beneficial tax treatment it offers over the corporation.

A California Limited Liability Company Provides Asset Protection.
As most landlords know, there is an inherent risk of liability with property ownership. Some of the risks are foreseeable and can be effectively insured against. Others cannot. Should an accident occur, you might lose not only the property itself, but all of your other personal assets as well. Although insurance can limit your potential exposure, why be exposed at all? The California limited liability company (LLC) offers its member-owners the same limited liability protection offered by the corporation. [California Corp. Code §17101(a)]. Even with adequate insurance coverage, if some negligent act results in severe injury to a tenant, worker, or guest, the resultant award may far exceed the insurance coverage. If the property is held in your personal name, the claimant will be able to attach your personal assets (including other properties, your home, bank accounts, vehicles, stock) to satisfy the judgment. By contrast, if the property is held in a California limited liability company, the LLC may be liable, and its assets subject to attachment by the judgment creditor, but the individual member's personal assets will remain protected.

In addition, a California LLC protects against claims by creditors of the members of the LLC. With a proper LLC Operating Agreement, the creditors of an individual member of the LLC cannot attach the assets owned by the LLC, nor can they step into the shoes of the member. At most, a judgment creditor will be able to place a lien on the distributions from the LLC to the member (if any).

Like a California corporation, a California LLC generally affords its owners with personal liability protection from lawsuits. But the assets within the LLC are not protected from such lawsuits, and creditors of the LLC typically can attach the LLC's assets. Accordingly, despite the additional tax burdens, you should consider placing each of your investment properties into their own separate California LLC.

A California Limited Liability Company Offers Many Tax Advantages.
A California Real Estate LLC can provide significant tax advantages, especially when compared to both a C-corporation and an S-corporation. Like a sole proprietorship or partnership, a California LLC enjoys pass-through taxation. This means that owners (known as "members") report their share of the income or losses on their individual tax returns. Because of the pass-through partnership tax treatment offered to the LLC, the LLC gets the best of both worlds: (1) the benefit of protection from personal liability; and (3) the tax benefit of being treated like a partnership, or sole proprietorship, as the case will be.

A Single-Owner LLC offers an additional unique benefit. Unless the owner of the LLC specifically elects to do otherwise, the IRS will automatically classify a single-owner LLC as a sole proprietor. The owner of the LLC reports the LLC's profits or losses on Schedule C of their personal tax return (usually Form 1040).
In California, spouses who own LLC interests as community property, file joint returns, and are the only members of the LLC, can choose whether the LLC will be treated as a partnership, or as a disregarded entity for income tax purposes (Rev. Proc. 2002-69). If the spouses opt to treat the LLC as a disregarded LLC, it makes it simple to complete a Section 1031 exchanges, as there is no risk that the real estate interests will be reclassified as partnership interests.

A traditional C-corporation is subject to double tax, both at the corporate level and at the personal level. When a C-corporation transfers or sells appreciated real property, the profit (gain) subjects the corporation to a capital gains tax at the corporate rate. Once the capital gains tax had been deducted, the remaining profits if distributed to the corporation's shareholders in the form of dividends, would again be taxed at the capital gains tax rate for individuals (10% to 15%). This is commonly referred to as "double taxation."
Although the S-corporation is similar to a California LLC as far as eliminating the "double taxation" issue, it has other negative tax treatments problems when real estate is involved. If the shareholders of an S- Corporation want to transfer a property held or owned by an S- corporation to another entity, or sell the property in exchange for another property to be held by the S-corporation, the sale or transfer would immediately trigger the 15% capital gains tax on the fair market value of the property minus its original cost. In addition, any losses that may have been realized by the sale are limited to the shareholder’s basis in the S- corporation. And worse, the S- Corporation cannot take advantage of the 1031 Exchange tax treatment. For example, if an S-corporation desires to transfer a property to say a partnership or a LLC so it can be developed, the shareholders of the S-corporation will have to pay income tax on the profit from the alleged sale. By contrast, the transfer or trade of property held by an LLC would be free of such income tax and can result in a tax-free transaction if done properly.

While every California LLC and California corporation must pay the $800 annual franchise tax, most California real estate holding LLCs that hold a single investment property can avoid the gross receipts tax, which does not apply unless the limited liability company's gross receipts equal or exceed $250,000.
The one major negative to the California LLC, which is why a personal home residence should never be placed in a California LLC, is the loss of the federal capital gain exclusion of $250,000 ($500,000 if you are married) on the sale of a personal residence. Pursuant to the 1997 Taxpayer Relief Act, homeowners can lock in a profit of up to $250,000 ($500,000 if married) and owe nothing to the IRS as long as the taxpayer lived in the home as a personal residence for at least 2 of the past 5 years.

Estate Planning Benefits offered by the California Limited Liability Company.
A California LLC also offer unique estate planning benefits for parents wishing to pass ownership of their property to their child(ren). One benefit is the ease of transfer of ownership. The ownership of real estate held by an LLC is represented proportionately by the member's shares in the LLC. Rather than filing a new deed, members can transfer ownership of the property to their children by simply increasing their membership percentage in the LLC.

Best of all, current tax laws allow a tax-free gift of up to $12,000 per year and because the interest transferred from a parent to the child(ren) would be unmarketable minority interests, the IRS will permit up to a 40% valuation discount on the fair market value of the real estate being transferred. In essence, the parents can continue to have control over the property as long as they are the managers of the LLC, and their child(ren) remain merely members of the LLC with a minority interest in the LLC (and in turn the real estate it holds).

For example, let's assume a parent owns a California real estate holding LLC. And let's further assume that the parent has decided to transfer some, or all, of his interest in that real estate holding LLC (and in turn the property) to his two children on a tax-favored basis. Using the annual gift tax exclusion ($12,000 per recipient in 2008), the parent can make annual gifts of interests in the California real estate holding LLC to each of his two children with no transfer tax cost. So the question now becomes, how much of an interest can the parent transfer? Assume the property held by the California LLC is worth $1 million dollars. Applying a valuation discount of 40%, the parent can make a tax-free transfer of $12,000 worth of the property to each child -- which actually represents $20,000 each, or two percent (2%). While you may not be able to transfer the whole of your interest via tax-free gifts, you can significant reduce the size of your estate.

Consider Forming a California Corporation to Manage Your Properties.
If you plan to own, or do own, a very large building with multiple tenants, or multiple rental properties, you should consider setting up a corporation to manage your properties. This will keep your paperwork to a minimum and hopefully substantially reduce the possibility of co-mingling your funds between multiple real estate holding LLCs. For all of the properties you have placed in an LLC, a single corporation can keep the books, pay the bills, arrange for repairs and maintenance, sign leases, etc.

Conclusion.
With the benefits of asset protection, tax savings and estate planning aids, the California real estate holding LLC has become the preferred entity for holding individual investment properties. The LLC offers the prized limited liability protection afforded to the corporation, but without the negative tax implications. Before embarking on the formation of a real estate holding LLC, however, you would be wise to speak with an attorney in your local area to discuss the laws in your state, and your particular needs and circumstances.

If you would like to retain the services of Melissa C. Marsh to form and organize a California LLC, please call 818-849-5206.

IRS Circular 230 Disclosure: As required by U.S. Treasury Regulations, you are hereby advised that any written tax advice contained on this web site is not written or intended to be used (and cannot be used) by any taxpayer for the purpose of avoiding penalties that may be imposed on a taxpayer under the U.S. Internal Revenue Service.

 
© 2005 Melissa C. Marsh. All Rights Reserved.

Federal jobless tax for employers expiring quietly

By STEPHEN OHLEMACHER, Associated Press

Nearly every private employer in the U.S. will get a tax cut on Friday.

It won't affect workers' paychecks. But the expiration of a 35-year-old "temporary" unemployment tax — about $14 a year per worker — will mean real money for some big companies at a time when President Barack Obama is pushing Congress to raise taxes on businesses by closing some loopholes.

Amid a fierce debate over whether higher taxes should be part of a deal to reduce annual deficits — in exchange for letting the government go further into debt — the small cut in federal unemployment taxes has received little attention on Capitol Hill. Most employers probably don't even know they are getting it, especially those who are being hit with bigger increases in state jobless taxes.

But business groups say every little bit helps, whether you're a small employer struggling to make a payroll or a huge company like Wal-Mart, with more than 1.4 million U.S. workers. That's nearly $20 million a year in savings for Wal-Mart.

Some worry that reducing federal unemployment taxes while the jobless rate hovers above 9 percent will add to the system's financial problems. But the tax cut will save businesses nationwide more than $14 billion over the next decade, according to congressional estimates.

"The death of any tax on jobs, no matter how big or small, is a historic moment and one to be celebrated," said Rep. Dave Camp, R-Mich., chairman of the tax-writing House Ways and Means Committee. "The fact that it has taken 35 years for this 'temporary' tax to expire clearly illustrates the dangers of higher taxes — once in place, they are unlikely to ever go away."

The expiring levy was a 0.2 percent surtax on the first $7,000 of a worker's wages. Getting rid of it effectively lowers the federal unemployment tax from 0.8 percent to 0.6 percent for most employers. That's a decrease from $56 a worker to $42 a worker each year — a 25 percent cut.

The tax is paid by nearly all private employers, who also must pay state unemployment taxes. Some services performed by employees of religious or charitable organizations are not subject to federal unemployment taxes. Other workers who are paid by commission also are exempt.

The surtax was first imposed in 1976 to help pay for federal unemployment benefits distributed in the 1970s. The tax was supposed to be temporary, but like a lot of short-term measures in Washington, it endured and was extended at least eight times, under both Republican and Democratic presidents.

President George W. Bush proposed extending it in his 2009 budget, and Obama proposed making it permanent in the 2012 budget he released in February. Both presidents said the additional tax was necessary to help sustain federal unemployment trust funds. But Obama's proposal has been largely ignored by Congress.

"Payroll taxes are always a big problem for small businesses because they are not based on the profitability of the business, like most taxes are," said Bill Rys, tax counsel for the National Federation of Independent Business. "Especially right now, when we have small businesses still really struggling to work their way out of this recession, every little bit has an impact on their bottom line."

The federal unemployment trust funds were drained by the recession in 2008, and federal jobless benefits are currently paid from general fund revenues, adding to the budget deficit.

George Wentworth, senior staff attorney at the National Employment Law Project, said letting the tax expire now is going to make it harder to replenish federal unemployment trust funds.

"For 35 years, that additional 0.2 percent has been critical to stabilizing the system, and certainly there's probably never been a time when the system had a greater need for that," Wentworth said.

The tax cut comes as Obama and GOP leaders are trying to negotiate a deficit reduction package. As part of the package, Obama wants about $400 billion in tax increases paired with more than $1 trillion in spending cuts. Republicans are balking at the tax increases.

At the same time, Obama wants to extend a temporary Social Security payroll tax cut that Congress passed for 2011. The Social Security tax cut, totaling $112 billion a year, goes to workers, while the unemployment tax cut goes to employers.

Employers pay federal unemployment taxes on top of state jobless taxes, which are generally much higher and have been increasing as states cope with high unemployment. State jobless taxes are based in part on rating systems for employers that take into account their recent history of laying off workers. More layoffs mean higher taxes.

In general, state taxes cover unemployment benefits and federal taxes pay to administer the program and provide loans to states when they run out of unemployment funds. Federal taxes also help pay for the federal extension of benefits when unemployment is high.

Copyright © 2011 The Associated Press. All rights reserved.

State legislators go unpaid as California reverts to dysfunctional type

Jun 23rd 2011 | LOS ANGELES | from the The Economist print edition

WHAT a lot of history California has been making this month. For the first time since 1933, the (Democrat-controlled) state legislature has the power to enact a budget with a simple majority, thanks to a ballot measure voters approved last year. So it passed a budget on June 15th, meeting the constitutional deadline—also for the first time in years. But the next day Governor Jerry Brown, himself a Democrat, vetoed that budget—apparently the first such veto in California’s history. The budget was not balanced, he said, and contained “legally questionable manoeuvres”.

His fellow Democrats scolded him. Mr Brown scolded them back, and the Republicans to boot. The Republicans were already scolding everybody, and saw no need to stop. Joining this free for all, the state’s independently elected state controller, John Chiang, decided to stop paying legislators. The new budget rules require withholding salaries from legislators for every day that a budget is late, he said. But our budget was not late, the legislators objected. Your budget had gimmicks and was not even balanced, Mr Chiang told them. He will get sued for his pains, it goes without saying.

Mr Brown’s Republican predecessor, Arnold Schwarzenegger, used to call the ritualised drama that is California’s budget process a “kabuki”. But Japanese kabuki plots only start ridiculous and complicated, before speeding up and resolving themselves with a cathartic bang in the fifth act. California will be lucky if it follows such a script. Indeed, Mr Brown’s second spell of governorship now runs the risk of failing in its first year.

Here is how the year has deteriorated so far. In January, facing what was then a deficit of more than $25 billion, Mr Brown proposed to solve half the problem by cutting spending and the other half by extending some temporary taxes. For the cuts, he expected support from his fellow Democrats. For the revenues, he did not ask for support from hostile Republicans, merely for their consent to put that question before voters in a special election, which requires a two-thirds majority in the legislature. The Democrats duly enacted their part, the cuts. But the Republicans refused to agree to put the revenue question to voters. A handful of them almost broke ranks, but then retreated into the safety of their caucus.

All through this the polls, which at first showed support both for the governor and for his proposed tax extensions, have been turning against Mr Brown. This undermines the strategy of going for a special election, even if he could still get one, since voters would probably reject the revenues anyway. Meanwhile, the economy and tax receipts have grown just enough to make Mr Brown’s argument look weaker and to shrink the remaining budget hole—to about $10 billion—but not nearly enough to solve the problem.

So there they are. The new fiscal year starts on July 1st, and California had no budget as The Economist went to press. Standard & Poor’s, a rating agency, says that California’s credit, at A- already the worst among the 50 states, is “at a crossroad”. Voters are angry. So are legislators. So are the governor and his wife, though presumably not their new dog, Sutter. That, though, is about the only bright spot.

from the The Economist print edition | United States

Merck Can’t Recoup $473 Million in U.S. Taxes, Court Rules

By Chris Dolmetsch and David Voreacos - Jun 20, 2011 1:41 PM PT 

Merck & Co.’s Schering-Plough unit isn’t entitled to a new trial after a judge rejected its claim to $473 million of federal income tax refunds, a U.S. appeals court ruled. 

Schering-Plough, which was acquired by Merck for $51 billion in November 2009, sued the Internal Revenue Service in federal court in Newark, New Jersey, in May 2005 to recoup the taxes, which the IRS assessed in 2004 after an audit.

Schering-Plough argued that funds it received as the result of two interest-rate swap transactions weren’t taxable as proceeds of loans from foreign subsidiaries and that the company was being treated unfairly by the IRS, which hadn’t demanded the same taxes from other companies that were in similar situations.

U.S. District Judge Katharine Hayden ruled after a five-week non-jury trial in 2008 that Schering-Plough failed to prove it deserved a refund, and in April 2010 she denied the company’s request for a new trial. The U.S. Court of Appeals in Philadelphia upheld Hayden’s ruling today, saying the transactions were loans and that the IRS may treat taxpayers differently.

“If taxpayers could routinely challenge tax assessments by pointing to others who had not been compelled to pay under similar circumstances, the IRS would be swamped by collateral litigation of this kind rather than being able to focus on whether the taxpayer actually complied with the law,” Judge Juilo M. Fuentes wrote for a unanimous panel.

Merck, based in Whitehouse Station, New Jersey, said in a statement that it’s “disappointed” by the ruling. The company said it is reviewing the decisions and considering its options.

The case is Merck & Co. vs. U.S., 05-cv-02575, U.S. District Court, District of New Jersey (Newark).

Debunking the Prop. 13 debunkers

Opinion L.A.

Observations and provocations
from The Times' Opinion staff

June 6, 2011 |  7:09 am

Jon Coupal, president of the Howard Jarvis Taxpayers Assn., responds to Steve Lopez’s June 1 column, "Debunking the myth of Prop. 13." If you would like to write a full-length response to a recent Times article, editorial or Op-Ed piece, here are our FAQs and submission policy. 
In his latest attack on Proposition 13, columnist Steve Lopez retreats to the ivory tower for moral support. When a USC demographics professor tells Lopez that support for Prop. 13 is based on myth, and that blocking tax increases is pathetic, dishonest and a long-term disaster, Lopez accepts the professor's words as gospel.
The only "myths" to debunk about Proposition 13 are those promoted by the tax-and-spend lobby and public employees unions, which would like you to believe that the state's landmark 1978 initiative to limit property tax increases has "devastated" California's education system while at the same time not providing any real benefits to homeowners and renters today.
First and foremost, Proposition 13 did not dictate how our government would spend property tax revenues. It simply set a property tax rate of 1% and limited annual tax increases to no more than 2%.
Proposition 13 is not responsible for shifting the responsibility of education funding from the local level to Sacramento. Years before Proposition 13 passed, the California Supreme Court ruled in Serrano vs. Priest, an equal-protection case, that school funding must be equalized for all California students. That meant education funding could not be based on property tax receipts, because wealthy neighborhoods with high property values could spend more per student than poor neighborhoods with lower property values. The funding of our education system based on varying property tax receipts was found unconstitutional, but you never hear the Proposition 13's opponents discuss this ruling or its implications.
You also never hear them talk about the fact that spending per pupil has actually increased 30%, adjusted for inflation, since Proposition 13 passed in 1978, according to research by the Howard Jarvis Taxpayers Assn.
Second, everyone benefits from Proposition 13. The moment California homeowners get the keys to their new home, they benefit from the law's protection -- and not just when the home value soars or if they've lived in their home for decades. Proposition 13 protects Californians from potential annual percentage increases in their tax bills in the double digits or more. For example, just a few months before Proposition 13 passed in 1978, then-Los Angeles County Assessor Alexander Pope announced that many parcels of property would see assessed valuations increase by as much as 100%. 
Proposition 13 saved many homeowners and businesses by simply setting the tax limit to provide stability. It allowed property owners to budget for their future and gave them protection from runaway taxes that would have forced many to sell their homes.
Government also benefits from Proposition 13, protecting it from severe yearly swings in revenue, including when the real estate market crashes and results in huge decreases in property value. The value reserve built into the system lets government predict revenues coming in, although, unfortunately, that doesn't prevent many politicians from spending above and well beyond that amount.
And renters also reap benefits. Without Proposition 13, you can be sure that higher business property taxes on apartment buildings would be passed on, in the form of higher rents, to working families and seniors living on fixed incomes.
The truth is, the system works. Critics such as Lopez say commercial property owners receive more benefits from Proposition 13. But since the measure passed, the assessed value of homeowner property has grown at an average of 8.1% per year, and assessed value of non‐homeowner property subject to Proposition 13 has grown an average of 8.4% per year, according to data from the California State Board of Equalization.
Finally, California property taxes are not among the lowest in the nation. Even with Proposition 13, we still rank higher than 36 other states when it comes to per-capita property taxes, according to the Tax Foundation. Without Proposition 13's protections, California taxpayers would fare far worse and property taxes would be at or near the top, just as we are when it comes to sales, car, gas and personal income taxes.
There is one thing Lopez and I can agree on: California politicians are too busy bickering and tinkering rather than doing their jobs. But instead of blaming California's problems on Proposition 13, it's time to focus on the real issues, such as runaway pension costs and unaccountable politicians refusing to rein in spending, while beleaguered California working families are forced to cut back.
-- Jon Coupal
RELATED:
Editorial: To fix California's budget, we need taxes too
Tim Rutten: It's time to pass California tax hikes legislatively
Editorial: A broken budgeting process
Steve Lopez: It's time to tinker with "untouchable" Prop. 13

April 15, 2011: House to vote today on budget. Hey – didn't they do that yesterday?

House Speaker John Boehner (l.), seen here with President Obama at a bipartisan meeting in the White House on April 13, will call today for a budget vote. Like he did yesterday. 

Pablo Martinez Monsivais / AP

Hold it a second – didn’t they do that yesterday? It was all over the news – lawmakers on Thursday had a big vote on a bill that squeezed $38 billion out of Uncle Sam’s spending plans. It passed, by a vote of 260 to 167.

Are they reenacting the movie “Groundhog Day” in Washington, with everybody doing the same thing over and over until Bill Murray wakes up and sees his shadow? Did the danged bill get lost in traffic on its way to the White House, and now they have to pass it again so President Obama has something to sign?

No, and no again. They’re voting on something different today. It’s all part of a US federal budget process that’s as confusing as a teenager’s excuses and more tangled up than the syntax of Charlie Sheen.

We’ll try to explain. On Thursday, the House passed a bill that funds the US government for fiscal year 2011, the one that’s already occurring. That’s right – only in Washington do they keep fighting past fiscal deadlines and then make adjustments to a budget that government managers are already implementing. It’s a little bit like changing the size of the ice rink after the hockey game has started.

The bill that’s already passed is the one that President Obama and Speaker John Boehner have struggled over for so long. If it hadn’t passed, the government would have shut down because all their temporary funds would have expired. In the end, neither side got everything they wanted.

“Welcome to divided government,” said Speaker Boehner, following Thursday’s vote.

On Friday, the House is voting on something different – the budget for the next fiscal year, 2012.

Only they’re not voting on something that will set spending levels in a hard-and-fast manner. That would be too simple. No, under the rules of the budget process, they are voting on a non-binding resolution – a sort of promise about overall goals they will try and follow, both for 2012 and beyond, in that mythical land known to Washington budgeters as “the out years.”

The resolution isn’t law itself. The President doesn’t get to sign it (or veto it). But it sets the stage for lots of things that might happen later in specific pieces of legislation.

Got that?

Specifically, Friday’s vote is on the GOP’s 2012-and-beyond budget outline drawn up by Budget Committee Chairman Paul Ryan (R) of Wisconsin. It would cut $6 trillion from federal spending over the next decade, compared to the competing outline submitted to Congress by President Obama in February.

Representative Ryan’s plan is the one that would change Medicare from a government entitlement program to a voucher-like system in which the US would help seniors buy private health insurance. To Republicans, it is something that shows they are serious about putting the nation’s fiscal house back in order. 

“The biggest threat to Medicare is the status quo and the people defending it,” said Ryan on Thursday.

To Democrats, it is a drastic program that voters won’t like when they figure out its real effects.

“They force seniors to leave the Medicare program and go into the private insurance market where costs continue to rise day in and day out,” said Rep. Chris Van Hollen (D) of Maryland, the top Democrat on the House budget panel.

To a certain extent, their argument here is moot. Ryan's plan is expected to pass the House easily, but run into a wall in the Democrat-controlled Senate.

2011 Offshore Voluntary Disclosure Initiative (OVDI)

IR-2011-14, Feb. 8, 2011
WASHINGTON — The Internal Revenue Service announced today a special voluntary disclosure initiative designed to bring offshore money back into the U.S. tax system and help people with undisclosed income from hidden offshore accounts get current with their taxes. The new voluntary disclosure initiative will be available through Aug. 31, 2011.

“As we continue to amass more information and pursue more people internationally, the risk to individuals hiding assets offshore is increasing,” said IRS Commissioner Doug Shulman. “This new effort gives those hiding money in foreign accounts a tough, fair way to resolve their tax problems once and for all. And it gives people a chance to come in before we find them.”

The IRS decision to open a second special disclosure initiative follows continuing interest from taxpayers with foreign accounts. The first special voluntary disclosure program closed with 15,000 voluntary disclosures on Oct. 15, 2009. Since that time, more than 3,000 taxpayers have come forward to the IRS with bank accounts from around the world. These taxpayers will also be eligible to take advantage of the special provisions of the new initiative.

“As I’ve said all along, the goal is to get people back into the U.S. tax system,” Shulman said. “Combating international tax evasion is a top priority for the IRS. We have additional cases and banks under review. The situation will just get worse in the months ahead for those hiding assets and income offshore. This new disclosure initiative is the last, best chance for people to get back into the system.”

The new initiative announced today – called the 2011 Offshore Voluntary Disclosure Initiative (OVDI) -- includes several changes from the 2009 Offshore Voluntary Disclosure Program (OVDP). The overall penalty structure for 2011 is higher, meaning that people who did not come in through the 2009 voluntary disclosure program will not be rewarded for waiting. However, the 2011 initiative does add new features.

For the 2011 initiative, there is a new penalty framework that requires individuals to pay a penalty of 25 percent of the amount in the foreign bank accounts in the year with the highest aggregate account balance covering the 2003 to 2010 time period. Some taxpayers will be eligible for 5 or 12.5 percent penalties. Participants also must pay back-taxes and interest for up to eight years as well as paying accuracy-related and/or delinquency penalties.

Taxpayers participating in the new initiative must file all original and amended tax returns and include payment for taxes, interest and accuracy-related penalties by the Aug. 31 deadline.

The IRS is also making other modifications to the 2011 disclosure initiative.

Participants face a 25 percent penalty, but taxpayers in limited situations can qualify for a 5 percent penalty.

The IRS also created a new penalty category of 12.5 percent for treating smaller offshore accounts.  People whose offshore accounts or assets did not surpass $75,000 in any calendar year covered by the 2011 initiative will qualify for this lower rate.

The 2011 initiative offers clear benefits to encourage taxpayers to come in now rather than risk IRS detection. Taxpayers hiding assets offshore who do not come forward will face far higher penalty scenarios as well as the possibility of criminal prosecution.

“This is a fair offer for people with offshore accounts who want to get right with the nation’s taxpayers,” Shulman said. “This initiative offers them the chance to get certainty about how their case will be handled. Just as importantly, those who truly come in voluntarily can avoid criminal prosecution as well.”

The IRS is handling processing of the voluntary disclosures in centralized units to more efficiently process the applications.

The IRS has launched a new section on www.IRS.gov that includes the full terms and conditions on the 2011 Offshore Voluntary Disclosure Initiative, including an extensive set of questions and answers to help taxpayers and tax professionals. The web site also includes details on how people can make a voluntary disclosure.

In the first voluntary disclosure program in 2009, taxpayers faced up to a 20 percent penalty covering up to a six-year period. Taxpayers came forward with about 15,000 voluntary disclosures in that effort covering banks in more than 60 countries.

Shulman said IRS efforts in the international arena will only increase as time goes on.

“Tax secrecy continues to erode,” Shulman said. “We are not letting up on international tax issues, and more is in the works. For those hiding cash or assets offshore, the time to come in is now. The risk of being caught will only increase.”