Deadline Fast Approaching for US Taxpayers with Undeclared Offshore Accounts to Enter IRS Settlement Program
By participating in the offshore account settlement initiative program, taxpayers potentially limit their liability to taxes on the income attributable to the previously undisclosed foreign accounts for the last six years – or the length of time the account was in existence, if less – plus interest on the tax imposed on that income and an accuracy-related penalty of 20% of the unpaid tax for each tax year at issue. Additionally, the taxpayer will be liable for a single penalty equal to 20% of the amount in the offshore account for the year in which the account had the highest aggregate value. This penalty may be reduced to 5% under special circumstances. Finally, the IRS will not refer any taxpayer who is accepted into the offshore account settlement program for criminal prosecution.
The terms offered by the IRS offshore account settlement initiative are extremely favorable as compared to the penalties a U.S. taxpayer faces if he does not voluntarily come forward. Currently, if during the course of an audit, IRS agents discover that a taxpayer has not reported an interest in an offshore account or income accruing on such accounts, the IRS may impose penalties of up to 50% of the balance of each offshore account for each year the account remains undisclosed. The taxpayer will also be liable for additional income tax on income earned by the foreign account plus interest on the additional tax. Additional penalties may include a fraud penalty of up to 75% of unpaid taxes and a penalty equal to the greater of $100,000 or 50% of the offshore account balance for willful failure to file Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (FBAR), for each offshore account. In some cases, the IRS may pursue criminal prosecution on tax evasion charges against taxpayers who intentionally failed to disclose their offshore accounts.
The IRS offshore account settlement program has been receiving a lot of attention because of the recent agreement between the U.S. and Swiss governments to provide the IRS with the identities of 4,450 U.S. taxpayers with undisclosed accounts at Swiss banking giant UBS AG. However, it cannot be emphasized enough that U.S. taxpayers with undisclosed accounts at other foreign banks - whether in Switzerland, Hong Kong, the Caribbean, or elsewhere – are also eligible and encouraged to participate in the offshore account settlement program. While the UBS case has been receiving the lion’s share of media attention, the U.S. is actively seeking similar information about U.S. taxpayers from other foreign banks. Furthermore, just because a taxpayer’s name is not on the list of 4,450 to be provided by UBS does not mean the IRS does not have other sources of information and may not become aware of an undisclosed account through other means. In fact, the IRS has reiterated its commitment to aggressively pursuing U.S. taxpayers with undisclosed foreign accounts, and will not rest with the UBS agreement.
The benefits of the offshore account settlement initiative are only available to taxpayers who come forward and make a voluntary disclosure of their offshore or foreign accounts by September 23, 2009. Taxpayers who come forward after the September 23 deadline may still make a voluntary disclosure under the regular IRS voluntary disclosure program, but will likely be required to pay larger penalties.
Both the offshore account settlement initiative program and the traditional IRS voluntary disclosure program are only available to taxpayers who make a voluntary disclosure request, who cooperate with the IRS in making a complete disclosure of the facts and who proactively make arrangements to pay the liabilities due. The benefits of the voluntary disclosure program are not available once the IRS or Department of Justice initiates a civil examination or criminal investigation of the taxpayer.
Care must be taken in determining whether to file a voluntary disclosure. Factors to consider include whether the taxpayer is required to file an FBAR, whether the foreign account is one which must be reported, who owns or has signatory authority over the foreign account, and other factors surrounding the establishment and maintenance of the offshore account. The voluntary disclosure process is complex and sensitive, thus, taxpayers are best served by contacting a tax attorney who is skilled at resolving disputes with the IRS as soon as possible.