by Brian Mahany
For months we have warned our readers of the perils of noncompliance with IRS regulations regarding offshore accounts. In 2009, just 15,000 Americans came forward out of a pool of 500,000 plus people with unreported foreign financial accounts. Since the IRS came out with their last chance amnesty program this year (the Offshore Voluntary Compliance Initiative) we have written no less than a half dozen stories and shared some of the horror tales of those who didn’t take advantage of the amnesty program.
Since writing those stories, I have talked to many people with offshore accounts. Out of those many, just 10% have elected to take advantage of the program and come into compliance. The other 90%? Sitting on the fence or simply willing to take their chances at the game called “audit roulette.” This time, however, the stakes are high and the chances of winning are lower than ever.
So why do so many people sit on the fence?
For weeks, I have debated that very question with our marketing VP, Sarah Myers, and our practice consultant, Dustin Cole. We are very competitively priced. We have the highly specialized amnesty knowledge that few lawyers have. And we know our message is getting out there. So why do so many people ignore our advice or let the clock tick on this great opportunity. Enter Dan Ariely.
Dan is a behavioral finance expert. A good very good one – he a doctorate in psychology and one in business.He has also written several books including a New York Times bestseller called Predictably Irrational. His premise is quite simple, we think irrationally. Obviously, there is much more to it, but at heart, we are irrational thinkers.
If one of our peers suddenly decides to comply with the law and not tempt fate, his or her immediate peers are likely to do so as well. But no one wants to be first, even if first means avoiding jail and losing 25% or less of your foreign account’s high value instead of half.
IRS Circular 230 says I lose my license to practice law if I tell you to not to comply with the law. That’s right, every CPA and lawyer will tell you that you should comply. I can’t speak for others but I actually think its a good idea in this instance.
Many believe that everyone cheats the IRS and most believe that as long as they keep it small, they won’t get caught. That conventional wisdom may work for criminal prosecution but the odds of getting caught and losing half or more of your account through civil penalties are great.
In the last two years, the US has signed a number of tax exchange agreements with other countries and beefed up its surveillance efforts. Yes, Uncle Sam can trace the flow of funds if you send a wire a transfer or mail a check to an offshore destiny. With the new tool of “John Doe” subpoenas directed at foreign banks, the chances of getting caught are at an all time high.
So what you should do? Both officially and honestly, I will tell you to take advantage of the amnesty. Even if our firm doesn’t do the paperwork, take advantage of the opportunity to reduce penalties to 5 to 25% of the account balance.
Hypothetically what should you do? If you have a professional license or work in the finance industry, expect to get criminally prosecuted if you play roulette and lose. The IRS loves prosecuting bankers, lawyers and accountants.
Have $75,000 or more in an offshore account? Expect to eventually get caught and lose half your money.
Think you are smarter than the IRS and simply move your money back to the U.S.? Still expect to get caught and pay half the historical high balance to the feds. Lucille Jackson (see our story from May 25th) had a Swiss account back in 2005 and later moved the money out of the account. That did not stop her conviction on federal felonies for having an unreported foreign account. And her $12,000 tax bill turned into $379,000 in penalties.
Have your money in a Swiss account? Are we really having this conversation or haven’t you read the Wall Street Journal lately. The IRS has been vigorously prosecuting those with unreported Swiss accounts.
Have your money in HSBC or UBS or Deutsche Bank or any other large foreign bank? Yup, expect to get caught. The big banks are ripe for John Doe subpoenas or cooperative audits with other nations. HSBC India and HSBC Bahamas are the latest foreign banks to come under scrutiny.
The only ones who may “win” at audit roulette are those with small accounts in even smaller foreign banks.
I know now after reading Dan Ariely’s work that most of you will remain unconvinced. But you have been warned. If you don’t want to be alone, come into compliance and tell all your friends. Once you become the trendsetter, odds are they will all choose to the tax compliance and offshore amnesty route. You may lose 1/4 of your account but you wont be in handcuffs and you wont have a $12,000 tax bill turn into $389,000.
If you have an unreported offshore account, consult with a tax attorney as soon as possible. The IRS continues to prosecute taxpayers with undisclosed foreign accounts even while the amnesty is going on. The present amnesty ends August 31st but it takes week to process the paperwork. Don’t wait until the last minute.
About the author. Brian Mahany is a lawyer and partner at Mahany & Ertl, LLC. He and his Wisconsin and Michigan based tax lawyers have helped taxpayers from Maine to California. They assist taxpayers with a wide range of tax problems including unreported income and amnesty applications. Brian can be reached at (414) 704-6731 (direct) or by email at