by Brian Mahany
There are no reported figures yet from the IRS, but we estimate that some 50,000 U.S. taxpayers participated in the Offshore Voluntary Disclosure Initiative or OVDI (IRS speak for offshore tax amnesty). If estimates are correct, there may be 1 million or more taxpayers with unreported foreign bank and brokerage accounts. What happens to all those people?
First, let’s examine the program and why so many people did not participate. The IRS ran a similar amnesty in 2009. The program brought in lots of money but only 15,000 taxpayers. Back then, there was not much advertisement or knowledge of the offshore reporting requirements. The taxpayers that did come clean often had tens of millions of dollars in Swiss or European banks and were usually quite sophisticated. They came clean to avoid prosecution for tax evasion and prison.
Shortly after the 2009 amnesty, the U.S. Justice Department, Obama administration and IRS began hammering Swiss banks looking for U.S. account holders. First, there was the “John Doe” subpoena on UBS Bank and thereafter criminal prosecutions of both private bankers and account holders. Those prosecutions continue today.
Because of the constant press and very public fights between the U.S. government and the Swiss, many more people now know they have a reporting obligation. We think that the 2011 amnesty will be more successful (assuming you rate “success” as how much money Uncle Sam collects.) Taxpayers certainly aren’t happy, however.
Two years ago, the perception of offshore account holders was often one of “fat cat” businessmen with “secret” Swiss or Cayman bank accounts. Now thousands of ordinary Americans realize they are covered by the law too. Our typical client this year is a dual national or foreign born business owner or professional. Tens of thousands hard working Asians and Indians have bank accounts back “home.” Others send money home to take care of poor or elderly relatives. One gentlemen did nothing more than get added to his mother’s account in the middle east so he could pay her nursing home bills more easily. These are often the clients that had no clue of their reporting requirements.
Owning a foreign account – bank or brokerage – isn’t illegal. But not paying tax on any income from that account or not disclosing the account is illegal. In fact, it is a felony.
Federal law says that foreign accounts must be reported each year on a FBAR form (Report of Foreign Banking and Financial Account). There is no tax on the account; only interest, capital gains, dividends or other income is taxable.
Even if you live outside the U.S., you must still generally report the foreign account if you are a U.S. citizen or green card holder.
In exchange for a free pass from criminal prosecution and audit, the IRS offered an amnesty program this year, OVDI. Unfortunately, that program ended on September 9th. In addition to avoiding prosecution (not a risk for most people) and audit, participants also avoided huge civil penalties that could easily wipe out the entire account.
Penalties can range from $10,000 per account per year to 50% of the account balance! Uncle Sam doesn’t like unreported accounts and has adopted extreme penalties. Amnesty participants, however, paid a one-time 25% penalty based on the historical high balance of the account. There were reduced penalties for small account holders and what we call “accidental Americans;” people living outside the US with foreign accounts that properly paid taxes on their foreign account in their home country and who didn’t derive any significant income from the U.S.
So why are there still hundreds of thousands of people who haven’t come forward? First, there are hundreds of thousands of people who still don’t know they have a reporting obligation. Our phone continues to ring with calls from panicked taxpayers and Americans living abroad who are just learning of their reporting obligation.
Second, there are many people who know about the law but have elected to play high stakes “audit roulette” with the IRS. They think they won’t get caught. Of course, if they do, their violations are willful and they do risk criminal prosecution and loss of everything. That’s a game we do not want to play with the IRS. The world is getting smaller everyday and the IRS catches people in some pretty amazing ways. (Read some of our prior posts including one on “audit roulette.”)
Now that the OVDI program is over, taxpayers can still approach the IRS and make a “quiet” or “voluntary” disclosure. The rules are not as clear cut, however. Although criminal prosecution can still be avoided in most instances, taxpayers will need to prove that they should be relived of penalties and that their actions were not willful.
Each case is now different. If you have an unreported offshore account or unreported income, find an attorney or CPA that concentrates in foreign reporting. Few do. Just about anyone can fill out the FBAR form but simply sending one in without a disclosure strategy or plan is a recipe for financial disaster.
The tax attorneys at Mahany & Ertl have helped individuals and small business all over the world with their US tax reporting obligations. For a confidential consultation, contact attorney Brian Mahany at (414) 704-6731 (direct) or by email at
Mahany & Ertl, LLC – America’s Tax Lawyers. Offices in Milwaukee, Wisconsin; Detroit, Michigan; Portland, Maine and San Francisco, California (satellite). Services nationwide.