by Brian Mahany
Folks not familiar with the current IRS tax amnesty program for unreported offshore accounts are often confused about how much in penalties will be collected if they successfully enter the program. Assuming one qualifies, the program has a three tiered penalty system.
Before discussing the penalties, some history of the program is useful. The current program is called the 2012 Offshore Voluntary Disclosure Program, sometimes referred to as “OVDP” or “OVDI.” Successful participants avoid criminal prosecution and huge civil penalties. How huge? How about $100,000 or 50% of the high balance for the unreported account for each year the account is unreported. Add the potential of an additional 75% fraud penalty and its obvious that the penalties can far exceed the amount in the account.
Entry is open to just about everyone with an unreported foreign bank or brokerage account. Exceptions include those taxpayers already under audit or criminal prosecution. If the IRS has already taken action against the bank where your account is located or obtained your name from the issuance of a “John Doe” informational summons (subpoena), you may not qualify either. In other words, the only way to take advantage of the program is to act quickly and enter before the IRS finds you.
As noted above, successful participants are eligible for greatly reduced penalties. For most people, that is a 27.5% penalty based on the year with the highest balance. The IRS will look back up to 8 years. (Remember those who are caught by the IRS face penalties for each year the account was unreported.)
If the aggregate balance of all the unreported accounts never exceed $75,000, you may qualify for a the lower 12.5% penalty. We say “may” because like all things with the Tax Code, there are exceptions. One of the bigger exceptions includes foreign assets obtained with improperly reported funds.
For a few taxpayers, there may be the ability to qualify for an even lower penalty – 5%. There are three broad categories included in the 5% lowest penalty tier:
A) “Accidental Americans.” These are foreign residents who were unaware they were also American citizens.
B) Foreign residents with minimal U.S. income. If you are a resident of a foreign country, made less than $10,000 each year in the U.S. and you have complied with the tax requirements of your home country.
C) Taxpayers who inherited an account in a foreign country and made minimal use of the account and has had minimal contact with the account itself and can prove that the funds deposited into the foreign account were made with post tax dollars.
The rules for the program are much more complex. There are many exceptions and the rules for the program are not well developed. (The OVDP program has only been in existence for a few months.)
If this isn’t complex enough, taxpayers who can demonstrate that their actions were not willful might do better opting out of the voluntary disclosure program completely. Although traditional disclosure methods usually involve an audit, the IRS can simply issue a warning letter or $10,000 penalty in non-willful violations.
If you have an unreported account, consider hiring a competent tax attorney immediately. The program is complex and the rules frequently change. A wrong move could involve possible prison and huge penalties.
The tax attorneys at Mahany & Ertl have helped many taxpayers with a wide variety of offshore reporting requirements including OVDI, the filing of FBARs (Report of Foreign Bank and Financial Accounts) opt outs, traditional disclosures and IRS criminal investigations. For a no obligation, confidential consultation, contact attorney Bethany Kroes at or by telephone at (414) 223-0464. All inquiries are protected from disclosure by the attorney client privilege.
Mahany & Ertl – Giving Taxpayers A Voice. Offices in Milwaukee, Wisconsin; Detroit, Michigan; Portland, Maine; Minneapolis, Minnesota & San Francisco, California (coming soon). IRS and tax services available nationwide and around the world.