by Brian Mahany
Not a week goes by that we don’t sound the alarm about the penalties for those with unreported offshore accounts. Most people heed our advice when they learn that foreign bank and brokerage accounts must be disclosed annually to the IRS. A few, however, would rather play audit roulette and hope they don’t get caught.
The penalties for an unreported account can be a s high as 50% of the highest account balance for each year in which the account was unreported. (Taxpayers are required to file a Report of Foreign Bank and Financial Account “FBAR” each year. This year, a new law called FATCA kicks in and that law also has its own reporting requirements.)
Although we warn all of our clients and potential clients, we feel that some don’t listen thinking that they won’t get caught or that the fine won’t be much. For all those that don’t believe us, consider this story from today’s InvestmentNews. According to the article, one taxpayer was fined $550,000 based on an unpaid tax bill of just $4000.
Why the disparity? Because the IRS says the tax bill results from an unreported offshore account.
Almost all IRS penalties are based on the amount of unpaid tax. Normally, a tax bill of $4000 might result in a penalty of $1,000 or less. In an offshore reporting case, however, the penalty is based on the highest balance in the account. That means the penalty can easily exceed the amount of unpaid tax.
The huge potential penalties are why we strongly recommend hiring a tax attorney to help you with unfiled FBAR’s, unreported foreign accounts and amnesty applications – for those not familiar, the IRS has offered yet another amnesty program that allows taxpayers to avoid criminal prosecution and “only” pay a 27% penalty on the high balance.
While the amnesty may be great for some taxpayers, for others it is not a bargain. If a taxpayer can demonstrate his or her actions were not “willful,” the penalties may be much lower. Taxpayers who feel they did not act willfully may be better with a traditional voluntary disclosure.
The current offshore tax amnesty program, called the Offshore Voluntary Disclosure Program or “OVDP” replaces a similar program last year called OVDI. The penalties are slightly higher, however, this year.
If all of this isn’t already confusing, the rules for FBARs are different from the new Foreign Account Tax Compliance Act program. that means compliance with one program doesn’t necessarily let you off the hook.
Unfortunately, many tax preparers and even accountants and lawyers are confused by the foreign reporting rules or are completely unaware of the requirements. If you have questions, consult a CPA with offshore reporting expertise. If you haven’t disclosed your foreign bank account and should have, contact a tax attorney.
The tax lawyers at Mahany & Ertl help taxpayers with a wide variety of offshore tax reporting matters. For more information, contact attorney Brian Mahany at (414) 704-6731 (direct) or by email at All calls are held in strict confidence.
Mahany & Ertl – America’s Tax Lawyers. Offices in Milwaukee, Wisconsin; Detroit, Michigan; Portland, Maine; San Francisco, California and Minneapolis, Minnesota. Legal and tax services available anywhere.