by Brian Mahany
Offshore reporting and unreported foreign bank accounts are hot topics these days. Candians are complaining, Indians living in the U.S. aren’t happy, dual nationals are crying foul… even the National Taxpayer Advocate is criticizing her own agency. Enter now Americans living overseas.
On Friday the group American Citizens Abroad (ACA) issued a press release condemning the IRS for its current enforcement policies and practices involving offshore income. According to ACA, only the United States (and renegade nation Eritrea) taxes on the basis of citizenship instead of residency. That means Americans living in Europe or Central America or Canada have to file taxes in the U.S. based on their world wide income even though that income was earned outside the U.S. and taxed by another country. It also means that these same U.S. taxpayers must file annual Reports of Foreign Bank and Financial Account or “FBARs.”
Even though the IRS is currently offering an amnesty (the Offshore Voluntary Disclosure Program or OVDI) for taxpayers with unreported foreign accounts, penalties can still be quite high – up to 27.5% of the highest account balances of each account over the last 8 years. That means taxpayers can be penalized even if the account is now closed!
According to the group, “By imposing large penalties for a simple filing omission, the IRS has adopted a camouflaged policy of taxing assets of Americans abroad through penalties.”
The IRS’ own taxpayer advocate was more blunt, she said, “a more effective initiative would have prompted even more taxpayers to come into compliance without leaving those who did come forward feeling terrified, tricked, or cheated.”
The group correctly points out that many of the OVDI tax amnesty participants owed no taxes to the U.S. since they paid already paid tax to their country of resident. Unfortunately by coming forward, they still had to pay huge penalties to the IRS.
Lest you think the safer course of action is to simply do nothing and hope you don’t get caught, the penalties for not reporting can be as much as 50% of the highest account balance for each year the account wasn’t reported. It’s easy to see how that could wipe out one’s entire life savings. If the violation was willful, one can be sentenced to up to 5 years of prison!
We agree with the ACA that most people who failed to file FBARs and report foreign financial assets did so innocently. It’s not just Americans living abroad that are getting caught in the crosshairs, its also dual nationals, U.S. greencard holders, foreign born Americans and those who inherited offshore stocks and bank accounts.
If you have an unreported account, talk to us. Although amnesty is a great deal for some people, there may be better options. For many taxpayers who can demonstrate that their actions were truly innocent, an amnesty opt out or traditional voluntary disclosure may be a better option. Whatever you do, doing nothing is probably not a winning strategy. Amnesty only works for those who come forward before the IRS finds them.
This years FATCA filing requirements makes the situation even more confusing. The bottom line? If you have an unreported foreign account of any type, call an experienced tax attorney.
The tax lawyers at Mahany & Ertl have helped many taxpayers with a wide variety of offshore reporting issues including FBARs, OVDI, opt outs, criminal tax investigations, traditional voluntary disclosures and FATCA filings. For more information, contact attorney Brian Mahany at (414) 704-6731 (direct) or by email at All inquiries are protected by the attorney client privilege.
Mahany & Ertl – America’s Tax Lawyers. We proudly give taxpayers a voice. Offices in Milwaukee, Wisconsin; Detroit, Michigan; Portland, Maine & Minneapolis, Minnesota. IRS services available worldwide.