by Brian Mahany, Esq.
[The following article was sent for publication by the Wisconsin Institute of CPA’s. It is being reprinted in full as an alert to all financial professionals and holders of unreported foreign financial accounts.] The April 15th filing deadline has passed and plenty of time remains for those clients on extension. There is another deadline quickly approaching, however. For tens of thousands of Wisconsin residents, it may mean the difference between peace of mind and criminal prosecution.
What are we talking about? The August 31st deadline to participate in the IRS’ Offshore Voluntary Disclosure Initiative (tax amnesty). If you think this doesn’t apply to any of your clients or couldn’t affect your practice, read on.
The IRS launched its first major offshore amnesty in 2009. That program yielded just 15,000 participants. Since then, the IRS has prosecuted many individuals with unreported Swiss accounts. So many, that when we think of unreported foreign accounts we think of tax cheats hiding money in UBS or other Swiss banks. Those stories captured the media’s attention but only account for a tiny percentage of those with unreported accounts.
So just who are these tens of thousands of Wisconsin residents with unreported accounts? They are mostly foreign born citizens or dual nationals.
Recently I conducted a quick straw poll by asking friends and acquaintances that were born outside the US if they maintained bank or financial accounts in their home country. Out of 6 asked, all 6 did.How many reported those accounts on Schedule B of their returns or on the mandated Report of Foreign Bank and Financial Accounts (FBAR)? None.
Obviously, filing a false return could be a felony. But failing to file the FBAR report (they are due now) is also a felony.
Thus far, few people have been prosecuted. All of the people I spoke with (and all were non-clients) professed to not know of the reporting requirements. Many think that accounts in their “home” country are not foreign. One said her parents in China set up an account their for her. Another said he owned three rental properties in his home country of Australia and used the account there to pay bills and collect rents.
The explanations may be rational but the conduct is still illegal.
Although criminal penalties of 3 to 5 years per filing year are a deterrent to many, the probability of prosecution for these “innocent” violations is quite low.The civil penalties are another story, however.
If the IRS finds out you have or had an unreported account, they can seek a penalty of 50% of the highest balance in the account. Even if you clean out the account tomorrow, the IRS can look back years and impose the 50% penalty on the previous highest dollar balance.
What are the chances of getting caught? They are increasing every day.
In the last two years, the US has executed a number of tax exchange agreements with foreign governments. The Organization for Economic Cooperation and Development maintains a list of uncooperative tax havens. As of last year, there were no black listed countries. There are still a number of jurisdictions were cooperation is poor but all countries have now either signed tax exchange treaties or have pledged to cooperate.
Not only is there historic cooperation internationally, the IRS is getting more sophisticated in its detection efforts. The newest tool is a “John Doe” subpoena in which the US government subpoenas all records from a foreign bank relating to known US taxpayers or those with US addresses or with extensive debit card use within the US.
Recent enforcement efforts targeted at HSBC Bank have yielded two criminal prosecutions of Indian Americans with accounts at HSBC India and one prosecution of an American with an unreported account at HSBC Bahamas.
Ultimately, the estimate of Americans or taxpayers in the US with unreported foreign accounts is between 500,000 and 1 million people. With that many people, chances are good that some are your clients.Each year we routinely sign off on returns, including returns in which the “no” box is checked to the question on Schedule B asking about foreign accounts.
Many CPA’s do not understand the FBAR requirements and the current amnesty program. Once amnesty is over, there may not be another chance for taxpayers to avoid prosecution and loss of half their offshore accounts plus possible tax, interest and penalties on any unreported interest income. Don’t let those upset taxpayers blame you.
The current amnesty ends August 31st but it is complex and involves considerable paperwork. Under the current rules, all paperwork, payments of penalties, amended returns and FBARs must be in by the deadline. (The 2009 program merely required that one apply by that deadline.)
Now is perfect time to educate clients and potentially save them from jail and certain financial loss. It’s a good time for you to avoid grief and aggravation too. Participants in the amnesty avoid prosecution and may only pay a 5, 12 or 25% forfeiture instead of losing half their account balance.
Remember, the penalty rules for foreign accounts look at the account balance, not any income derived from the account.
This article is simply an overview of the law and current amnesty program. There are many exceptions, limitations and special rules, especially on the reduced penalty provisions for amnesty participants. Obviously, this article is informational only. We are happy to answer your questions without obligation and help you and your clients if more formal assistance is needed.
About the author. Brian Mahany is a tax attorney with offices across the Midwest and East Coast. He lives in Delafield, Wisconsin and is the former commissioner of Maine’s state revenue agency, a former assistant attorney general – tax division and revenue officer. Brian has contributed articles to the Journal of Accountancy and to the Wisconsin Institute of CPA’s. He welcomes questions and comments; he can be reached at