IRS Announces Indefinite Voluntary Disclosure Program for U.S. Taxpayers with Offshore Accounts
February 8, 2012
The Internal Revenue Service announced last month that it has reopened, this time for an indefinite period, its voluntary disclosure program for taxpayers with unreported offshore financial accounts. The terms of the program are essentially the same as the 2011 offshore voluntary disclosure initiative, but with a maximum penalty, for the failure to file FBARs and other information reports, of 27.5% (rather than 25%) of the highest value of the undisclosed accounts.
Like the prior programs, the new one will most benefit those taxpayers whose tax violations were most egregious, especially individuals who may face potential criminal prosecution. Presumably many of those persons have already made disclosure. Those who have not may be determined to try to avoid detection. However, tax evaders may now have greater reason than ever to believe that their transgressions will eventually be disclosed to the IRS. The very recent U.S. indictment of Switzerland's oldest private bank, Wegelin, on tax evasion conspiracy charges is a clear message that the government will continue its efforts to track down offshore tax cheating. And just today the IRS announced that it had reached agreement with five European countries (France, Germany, Great Britain, Italy and Spain) under which the six governments agreed “to intensify their cooperation in combating international tax evasion.” The agreement resulted from inter-governmental discussions regarding the implementation of the U.S. Foreign Account Tax Compliance Act (or FATCA), which imposes extensive new information collecting obligations on non-US financial institutions. The IRS issued voluminous proposed FATCA regulations today.
The question often arises whether those whose sins are more venial ought to participate in the voluntary disclosure program. Some are just now realizing that they are non-compliant. Many of these are individuals who are U.S. citizens who have lived for many years or even all their lives in another country. Very often they are dual citizens who never use their U.S. passport. Such individuals may be eligible for reduced penalties under the formal program, but even the reduced penalties may seem excessive. Individuals in this position have essentially three options (in addition to continued noncompliance):
1. Full participation in the new program, with acceptance of the automatic penalty regime.
2. Participation in the new program, but with the intention to “opt out” and negotiate with the IRS over the amount of penalties based on the particular facts and circumstances. This is equivalent to a traditional “noisy disclosure” outside any formal program.
3. A “quiet disclosure” involving full tax compliance going forward, perhaps combined with a filing of tax returns (or amended returns) for the past two or three years.
In our experience there is generally no clearly right or wrong response. Each taxpayer and his or her adviser will want to consider the individual circumstances, including the client’s appetite for risk, before deciding upon any specific course of action.
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