IRS Cracks Down On Undisclosed Foreign Accounts
The message from the IRS to owners of undisclosed foreign financial accounts is clear: Enter the IRS Offshore Voluntary Disclosure Initiative (OVDI) or risk criminal prosecution and/or enormous civil penalties.
United States taxpayers are required to pay taxes on their worldwide income and to disclose the existence of foreign financial accounts on their tax returns. If the account or accounts have a value in excess of $10,000, taxpayers are also required to file a Report of Foreign Bank and Financial Accounts (FBAR) by June 30 of each tax year.
Criminal penalties associated with failure to report a foreign financial account are a maximum fine of $250,000 and up to five years in prison. The penalty for a non-willful civil violation is a fine of up to $10,000. However, if the violation is deemed willful, then the penalty is the greater of $100,000 or 50 percent of the account balance at the time of the violation. The foregoing penalties are applicable to each violation of the FBAR reporting rules.
Many clients are indecisive and apprehensive about making a voluntary disclosure, in light of the hefty penalties imposed by the OVDI. Some clients are willing to "take their chances" and avoid entering the OVDI. It is important to make these clients aware of IRS enforcement initiatives.
Since 2007 and beginning with the United Bank of Switzerland, the government has launched investigations of foreign banks that have resulted in disclosures of account-holder information to the IRS. The government has also been actively pursuing treaty requests with countries with which the United States has tax treaties. Finally, the government has at its disposal the recently enacted Foreign Account Tax Compliance Act (FATCA).
While the intricacies of FATCA are beyond the scope of this article, the act represents a major enforcement tool for the government. FATCA was signed into law in 2010, and already the United States has understandings or agreements with Ireland, Denmark, France, Spain, Germany, Italy, the United Kingdom and Switzerland, to implement information exchange regarding foreign accounts. And the government is aggressively pursuing agreements with other countries.
These government enforcement initiatives make it much more likely that the IRS will become aware of undeclared foreign accounts of US taxpayers. Once the IRS is aware of undeclared foreign account information, the OVDI is no longer an option available to a client, and much more severe...
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