New Program for Offshore Accounts

by Linda Beale

New Program for Offshore Accounts
crossposted with Ataxingmatter

As I mentioned in earlier posts, the IRS has released information about a new voluntary disclosure program for offshore account holders.  The last program, which closed in October 2009, provided a low penalty of 20% of the highest aggregate balance in offshore accounts for the various failure to file information returns (FBAR and others) and elimination of any risk of a 75% fraud penalty or criminal prosecution for those accepted into the program who ‘truthfully, timely, and completely” comply with their disclosure obligations under the initiative.  This one is only slightly harsher, with a 25% aggregate-balance penalty.  Participants would also pay a 20% accuracy-related penalty on any tax underpayments for relevant years.

The information is available on the IRS website under “How to make a Voluntary Disclsure under the 2011 OVDI (standing for “Offshore Voluntary Disclosure Initiative”) and in a new Q/A on the website, 2011 OVCI frequently asked questions and answers.  Generally, a taxpayer (or representative) asks the IRS criminal investigation division for a “pre-clearance”.  If granted, it essentially means that the taxpayer is not already a person of interest to the IRS for offshore accounts.  Then the taxpayer has thirty days to comply with the reporting obligations by filing an “offshore disclosure letter“.  That letter discloses the source of the funds, informs the IRS if the taxpayer or related entities are under audit or criminal investigation, and estimates the highest values and income of the offshore accounts for the years between 2003 and 2010.  The taxpayer has to reveal the country, institution, contact at the institution, date account opened, information about any entities connected with the account(s), and details of all meetings and other communications with the account institution and with other advisers about the account.  Once accepted into the program, the taxpayer must make a “full” voluntary disclosure by August 31, 2011–this includes filing amended returns, paying the prescribed penalties, providing complete information on facilitators of the offsore accounts, and filing a closing agreement with the IRS.

The Q&A uses an example of a person with a million on deposit since before 2003, earning $50,000 a year from 2003 to 2010.

They would pay $518,000 plus interest. This includes:

  • Tax of $140,000 (8 years at $17,500) plus interest,

  • An accuracy-related penalty of $28,000 (i.e., $140,000 x 20%), and

  • An additional penalty, in lieu of the FBAR and other potential penalties that may apply, of $350,000 (i.e., $1,400,000 x 25%).

If the taxpayers didn’t come forward, when the IRS discovered their offshore activities, they would face up to $4,543,000 in tax, accuracy-related penalty, and FBAR penalty. The taxpayers would also be liable for interest and possibly additional penalties, and an examination could lead to criminal prosecution.

It will be interesting to see how this plays out.  Some of my colleagues who practice in this area tell me they believe there are at least several hundred thousand Americans who have “substantial” foreign accounts.  But there are a number of them, I understand, who have decided to take the risk of not being discovered in order to continue to avoid paying these taxes and penalties.  As these programs increase the numbers of accountholders who report contacts, banks and advisers who have assisted in this process, the risk becomes measurably greater.  Personally, I hope that those who choose to continue being scofflaws are the losers and not the government (which is just “we the people”).