by Brian Mahany
Spend an hour on the Internet and you will find many self-proclaimed experts suggesting the best way to come into compliance with the IRS offshore reporting rules and avoid steep penalties. Several theories abound including “quiet disclosures”, “opt outs,” “noisy disclosure” and going the amnesty route which involves a one time 27.5% penalty. (If you look in the darker reaches of the Internet, some experts will also suggest how to hide your money and in effect, commit tax evasion.)
There is no one size fits all approach. What works for some doesn’t work for others. A good tax attorney or CPA can help you determine the advantages and disadvantages of all your options.
Many people that speak with us are afraid of opting out. They fear the risk of the unknown. New data released by the IRS suggests that opt out may be a great alternative for many taxpayers. Before going into more detail, a brief refresher is needed.
The IRS requires all U.S taxpayers, including Americans living overseas and foreign born resident aliens, to report foreign financial accounts. Those accounts must be reported annually by June 30th of each year on a Report of Foreign Bank and Financial Accounts (FBAR for short). Failure to file an FBAR may be a felony and carry huge penalties if the failure was willful.
The IRS is currently offering an amnesty program called the Offshore Voluntary Disclosure Program. That program is frequently called OVDI or OVDP. With few exceptions, people participating in OVDI pay a one time 27.5% penalty based on the year with the highest unreported account balance.
Taxpayers that can prove their failure to file was not willful may only face a $10,000 penalty. Sometimes, all penalties can be waived. To qualify for the lower penalties, taxpayers have to “opt out” of amnesty. Once they leave amnesty or start by negotiating directly with the IRS, there is no going back.
Under the OVDI rules, there is no audit, no threat of criminal prosecution and just a one time penalty. The penalty is high but many people still take advantage of amnesty because there is little risk. You know what you must pay if accepted. An opt out, however, carries the risk that the IRS will not agree that failure to file was a mistake. In that case, penalties can be as high as $100,000 or 50% of the highest account balance per year, per account.
According to data just released by the IRS Taxpayer Advocate, taxpayers who opted out of the 2009 OVDI program paid an average of $15,737. That penalty is much lower than the average amnesty filer.
The lesson here is that while the government suggests and encourages people to come into compliance through amnesty, taxpayers are often fair much better by making a voluntary disclosure and opting out of amnesty.
There is some risk making a traditional, voluntary disclosure could lead to penalties higher than those found in OVDI. Experience, however, suggests that the risk is low.
Opting out really comes down to risk tolerance. Under amnesty, the penalties are fixed. Some clients like the certainty and finality offered by amnesty. Others do not.
Whatever you decide to do, doing nothing is the worst possible choice. Beginning next year foreign banks are required to notify the IRS of accounts with ties to the United States. The stakes are high and the risks of getting caught are growing daily.
Whether or not you hire us, we are happy to discuss your options with you so that you can make a more informed decision.
The tax lawyers at Mahany & Ertl have helped many taxpayers with a wide variety of criminal and civil tax matters. From OVDI filings to FATCA and delinquent FBARs, we can help.
For more information, contact attorney Bethany Kroes at or by telephone at (414) 223-0464. All inquiries are protected by the attorney – client privilege and kept in strict confidence. Whether you hire or us or not, we will gladly discuss your options at no cost and without obligation.
Mahany & Ertl – America’s Tax Lawyers. Offices in Milwaukee, Wisconsin; Detroit, Michigan; Portland, Maine; Minneapolis, Minnesota and San Francisco, California. IRS tax services available worldwide.
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