by Brian Mahany
“Should I just close my foreign account and hope I don’t get caught?” We frequently get asked this question. With the penalties so high for unreported offshore accounts, many taxpayers are tempted to simply close the account and transfer their money back to the United States. That may sound like a great plan but it isn’t.
By now, anyone who reads this blog knows that foreign financial accounts must be reported annually to the IRS. Qualifying accounts include bank accounts, foreign hedge funds, brokerage accounts, CD’s and even some insurance products. Those required to file include all U.S. taxpayers as well as Americans living abroad, dual nationals, American students living abroad and green card holders. (If you wish to read more information about offshore reporting, simply use our search engine in the upper right corner of our blog, Due Diligence. Terms such as FBAR, FATCA, OVDI and offshore reporting will bring you hundreds of informative articles we have written.)
Foreign accounts are reported annually on a Report of Foreign Bank and Financial Accounts (FBAR). The penalties for not filing an FBAR range from a low of $10,000 per account for negligent violations to 5 years in prison and $100,000 or more per account per year if the failure to report was intentional. The current IRS amnesty program, called the 2012 Offshore Voluntary Disclosure Program or “OVDP” calls for a one time 27.5% penalty. (There are lower penalties for some taxpayers – consult with an experienced tax attorney to see if you qualify.)
With such high penalties, it is easy to see why so many taxpayers simply want to quietly close their foreign accounts and bring home their cash. Unfortunately, such a plan is fraught with peril.
First, the U.S. Treasury has signed tax exchange agreements with many foreign governments. More are being added every year. These agreements allow the government to seek account records from foreign banks. Often the government seeks records going back several years. That means closing your account today doesn’t necessarily mean that your account won’t be discovered. Generally the IRS can only look back 6 years but there is some recent case law that suggests there is no statute of limitations for unreported foreign accounts.
Next, the Foreign Account Tax Compliance Act (FATCA) will soon require foreign financial institutions to report account holders with ties to the United States. Even if your account is held in the name of a foreign trust or entity, your bank will soon be required to investigate and ascertain who holds the beneficial ownership in the account. Obviously, some folks will slip between the account but the hundreds of thousands who are identified will face huge penalties.
If these are not not enough good reasons to not avoid reporting, the IRS plans to have banks retroactively identify Americans who recently closed or moved their account.
Moving your account in anticipate of the new FATCA rules could also be interpreted as evidence of your guilt.
While some folks think they can simply bring back their offshore funds, others wonder if they can quietly late file an FBAR form for this year and ignore the prior years. The IRS calls this a “quiet disclosure”. This too is fraught with peril.
The IRS has specifically warned taxpayers about trying the quiet disclosure route. If you are asked or questioned about how long you owned your foreign account and lie, the penalties include prison. In other words, your problems can quickly escalate.
The best advice we offer is coming clean with the IRS. If you deliberately hid or concealed money offshore, the amnesty program offers you a way to avoid prosecution and greatly reduce your penalties. If your failure to report was truly innocent, consider having your attorney “opt out” of amnesty. There are no guarantees once outside of amnesty but for those who can demonstrate that their failure to report was a mistake or for those who relied on bad tax advice, a traditional disclosure may be the best bet. in some cases, the IRS can waive all penalties and just give you a warning.
The tax lawyers at Mahany & Ertl have helped many taxpayers with offshore accounts. We can help you decide what option is best for you and minimize any penalties you may be facing. Most importantly, we can eliminate the anxiety and need to look over your shoulder for months and years.
Mahany & Ertl – America’s Tax Lawyers. Offices in Milwaukee, Wisconsin; Detroit, Michigan; Portland, Maine; Minneapolis, Minnesota and coming soon, San Francisco, California. Services available worldwide.