by Brian Mahany
Many of our tax clients with unreported offshore accounts ask if they will receive the maximum penalties if they decide not to enter into the IRS’s tax amnesty program. That’s a great question considering the IRS uses the threat of severe penalties to gain compliance with the offshore reporting rules.
The current amnesty program, called the Offshore Voluntary Disclosure Program (sometimes called “OVDI” or “OVDP”), allows those with unreported foreign bank and brokerage accounts to pay a 27.5% penalty based on the highest balance of the unreported accounts during the last 8 years. That means if you have an account worth $800,000 today and $1 million in 2009, the IRS would extract a $275,000 penalty.
There are reduced penalties for small accounts and in certain other limited circumstances.
Why would anyone agree to such a huge civil penalty? The answer is simple. Failure to disclose an offshore account can be a felony if intentional and carries civil penalties of up to 50% of the highest balance for each year the account was unreported or $100,000 per year, whichever is higher. That means if you have owned a $500,000 account for the last 4 years the penalty could be $1 million – an amount twice the value of the account! If you don’t believe us, just look at FAQ 12 on the IRS own OVDI website.
Most people who approach the voluntary disclosure program feel like they are between a rock and a hard place. Lose all your money and potentially go to prison versus paying a huge 27.5% penalty. Remember, the penalty is based on the value of the account. Most U.S. taxpayers with offshore accounts have already paid tax on the money they earned. Unless the money is from drug dealing or other illegal activities, the money has already been taxed once.
There is hope, however. The penalties most often quoted are for willful violations. Yes, there are some business people that intentionally try to hide money from the IRS or a spouse. Most violators, however, simply didn’t know about the law. The typical amnesty applicant is a dual national, an American living overseas, a foreign born American or a person sending money “home” to family in India, Mexico or China.
The IRS’ website does not draw a distinction between these groups. That causes many people who have truly made an honest mistake to needlessly panic.
Recently there has been a growing thought that the courts could strike down the FBAR* penalties law as a violation of the Eighth Amendment to the U.S. Constitution. The Eight Amendment, adopted in 1791, says that “Excessive bail shall not be required, nor excessive fines imposed, nor cruel and unusual punishments inflicted.” While most people think of criminal and death penalty cases, there is a growing body of law surrounding the “excessive fines” language. [*An FBAR is a Report of Foreign Bank and Financial Account, the form that U.S. taxpayers must use to report foreign financial accounts yearly.]
In 1998, the U.S. Supreme Court ruled it was unconstitutional to fine a person $357,144 for failing to report cash in excess of $10,000 being removed from the country. Removing cash is not illegal just like opening a foreign account isn’t illegal. The law requires you to report both transactions, however.
In striking down the fine, the court found it was “grossly disproportionate” to the violation.
There is little guidance thus far from the courts, however the IRS has recognized the dangers in enforcing the 50% – per – year penalties on innocent violations. The Internal Revenue Manual used by IRS employees notes that the penalties established by Congress are the maximum amounts that can be imposed. Revenue agents are instructed to consider warning letters or lower penalties except in the most egregious cases.
If you have an unreported foreign account, contact a lawyer or CPA experienced in foreign reporting requirements. The decision to file under the OVDI amnesty program or seek a traditional disclosure is one that requires careful investigation. Once you make a traditional disclosure it is impossible to seek amnesty, however an amnesty applicant can always “opt out.”
If you have an unreported foreign bank or brokerage account, give us a call. Our tax lawyers have helped many people with unreported Swiss, Indian and other foreign accounts. All inquiries are protected by the attorney client privilege and are kept in strict confidence. For more information, contact attorney Bethany Kroes at or by telephone at (414) 223-0464. The author can also be reached at .
Mahany & Ertl – Giving Taxpayers A VOice. Offices in Milwaukee, Wisconsin; Detroit, Michigan; Portland, Maine & Minneapolis, Minnesota. IRS legal services available nationwide and worldwide.