by Brian Mahany
Amnesty has been over for months and yet many people still have not reported their offshore accounts to the IRS. For some the decision is intentional. For many others, they only just became aware of the law.
The vast majority of offshore account holders are not multimillionaires with hidden Swiss accounts. They are computer programmers, doctors and shop owners with accounts in their home countries. Or they have accounts they opened for family members left behind while they seek to earn a living wage in the US and send money home.
As I type this blog post I am sitting on the north coast of the Dominican Republic. A place where the hotel workers earn $1.25 per hour. Yeah, $10 a day. For many dual nationals and foreign-born Americans, a thousand dollars per month sent “home” can help entire families survive.
The Internal Revenue Code requires American taxpayers, wherever they live, to report bank and brokerage account interests outside the U.S. Our law also requires that income earned outside the U.S. – that could be interest, dividends or capital gains – also be reported even if tax was paid to another country. (In most cases there is a credit for any taxes paid to another country.)
Earlier this year the IRS ran an amnesty program called the Offshore Voluntary Disclosure Initiative. This was the second such amnesty in the last three years. Will there be another? Who knows?
Unfortunately, many people missed the amnesty program. We receive questions weekly from taxpayers wondering what they should do. Some think that they can just quietly file a current FBAR form (foreign accounts are reported annually on a Report of Foreign Bank and Financial Account) or simply amend last year’s tax returns to include the foreign income.
Officially, the IRS discourages these so called “quiet disclosures” and warns that taxpayers that think they can simply “slip one under the radar” will not avoid penalties – penalties that are 50% of the high account balance or each year in which the taxpayer “willfully” failed to report.
What does “willful” mean? That’s a good question and hotly litigated today. Needless to say, the IRS definition of “willful” is pretty loose.
That leaves two other options. First is the ostrich approach. Do nothing and hope you don’t get caught. With such huge interest and penalties, losing the game of IRS roulette can be devastating. And it can land you in prison.
The other alternative is to make a voluntary disclosure. Unlike a quiet disclosure in which one simply files or amends the appropriate forms and “prays”, a voluntary disclosure engages the IRS in a dialogue.
Because the IRS encourages voluntary compliance, voluntary disclosures almost always earn the taxpayer a pass on any possible criminal penalties. Very often taxpayers can also get a significant break on penalties.
Seeking a voluntary disclosure doesn’t require a lawyer but a lawyer with a strong background in offshore reporting requirements and a history of working with the IRS is certainly a plus. Unlike the amnesty program that helped taxpayers avoid audits, taxpayers coming forward now can expect the IRS to ask more questions. If you are going to come into compliance, make sure the rest of your return is in order or be willing to clean up those problems too.
The world gets smaller and smaller each day meaning the risk of getting caught grows exponentially each year.
The tax attorneys at Mahany & Ertl have helped people across the United States and across the world come into compliance. If you are sitting on the fence, confused or just want more information, give us a call. No obligation and all calls are completely confidential.
Mahany & Ertl – America’s Tax Lawyers. Offices in Milwaukee, Wisconsin; Detroit, Michigan; Portland, Maine and San Francisco, California. Services available nationwide.