IRS Again Encourages Taxpayers with Offshore Accounts to Come Clean and Tell All

by Keith Codron on Jun. 27, 2017


Summary: It is perfectly legal for a U.S. citizen or resident to hold money, securities, real estate, insurance policies, annuities, business interests or other lawful property or investments outside the territorial jurisdiction of the United States

It is perfectly legal for a U.S. citizen or resident to hold money, securities, real estate, insurance policies, annuities, business interests or other lawful property or investments outside the territorial jurisdiction of the United States, individually or through the medium of a trust, corporation, partnership or LLC, in any one or more financial accounts and in any one or more countries, provided, in all such cases, that the source of the money or other property is fully disclosed to the Treasury Department, and, further, that all of the worldwide income, gains and profits from the foreign accounts, property or entities are reported annually to the Treasury Department to be taxed in accordance with the internal revenue laws of the United States.  Many affluent taxpayers have legitimate, non-tax reasons for maintaining financial accounts overseas, chief among them being protection of their hard-earned, lawfully-derived earnings and assets from the claims, liens or judgments of future potential creditors or plaintiffs, including but not limited to disgruntled employees, former business partners and associates, ex-spouses, disinherited relatives, accident-prone tenants and household guests, feuding neighbors, overreaching homeowners’ associations, buyers and sellers of property, and “victims” (real or imagined) of this or that type of physical or psychological harassment, undue influence, discrimination, oppression or unfair treatment.

Convinced that U.S. taxpayers with offshore accounts, particularly those with foreign trusts, are cheating the tax man, or worse, that they may be involved somehow in money laundering, terrorism financing or narcotics trafficking, and in its never-ending quest to reduce the amount of underreported income by affluent taxpayers availing themselves of sophisticated estate and asset protection planning through the use of offshore financial structures, IRS has launched a 2011 sequel to its original blockbuster hit, the 2009 Offshore Voluntary Disclosure Program [“2009 OVDP”], that netted 15,000 voluntary disclosures. According to IRS Commissioner, Doug Shulman, “as we continue to amass more information and pursue more people internationally, the risk to individuals hiding assets offshore is increasing.”  In this regard it should be noted that the purpose of asset protection planning is not to hide or deny the existence of income or assets, nor to avoid one’s bona fide debts or obligations, but rather to legally and ethically reposition capital holdings in a tax-neutral structure that is designed to make one a less attractive target of those who might possibly seek to abuse the civil justice system by playing the litigation lottery game.

The new program is referred to as the 2011 Offshore Voluntary Disclosure Initiative [“2011 OVDI”]. It runs through August 31, 2011, and it is sure to top the 2009 OVDP in total receipts for the U.S. Treasury. As stated on IRS’s official website, the first such disclosure program, which ended on October 15, 2009, “demonstrated the value of a uniform penalty structure for taxpayers who came forward voluntarily and reported their previously undisclosed foreign accounts and assets,” and that, therefore, “it was determined that a similar initiative should be available to the large number of taxpayers with offshore accounts and assets who applied to IRS Criminal Investigation’s traditional voluntarily disclosure practice since the October 15 deadline.”  The government loves to pitch these programs as being voluntary, notwithstanding the fact that the penalty for tax evasion or fraud is often a multiyear change of address to a federal prison and the confiscation of most, if not all, of one’s worldly possessions. 

The 2011 OVDI has a penalty structure which is significantly higher than the 2009 OVDP, which means that people who did not come forward in 2009 will not have been rewarded for waiting.  In general, the 2011 initiative requires individuals with previously undisclosed foreign accounts to combine the value of all such accounts and pay a penalty equal to 25% of the highest aggregate account value attained during the eight calendar years, 2003 through 2010, inclusive, covered by the program.  Some taxpayers will be eligible for a reduced 12.5% penalty rate if the highest aggregate account value did not exceed $75,000 at any time during the years in question.  Further, an even smaller number of taxpayers will qualify for the special 5% penalty rate applicable to accounts which the taxpayer (A) did not open or cause to be opened, and with respect to which the taxpayer (B) has exercised minimal, infrequent contact and (C) not withdrawn more than $1,000 in any of the years covered by the initiative.  This “offshore penalty,” as it is referred to in the 2011 OVDI, is in addition to the 20% accuracy-related penalty for understated income and the requirement to pay all of the back taxes and accrued interest.

If IRS has already initiated a civil examination, regardless of whether it relates to undisclosed foreign accounts or entities owned or controlled by the taxpayer, the taxpayer will be ineligible to participate in the 2011 OVDI program.  The same is true, of course, for taxpayers already under criminal investigation.

Participants in the 2011 OVDI program will have to provide copies of previously filed federal income tax returns for the years covered by the initiative.  They also must file amended federal income tax returns for such years, detailing the amount and type of previously unreported income from the undisclosed offshore account or entity.  They are also required to submit Treasury Department Form 90-22.1 (Report of Foreign Bank and Financial Accounts), commonly known as the “FBAR” form.

In summary, the 2011 OVDI program represents a fair and reasonable way for those taxpayers with undisclosed foreign accounts or entities, who are not currently being audited by IRS, to bring themselves into tax compliance and thereby avoid substantially greater civil penalties and possible criminal prosecution in the future.  Because IRS has increased its examination personnel with additional funding to combat the “tax gap” (the difference between that which is owed to the U.S. Treasury and that which is actually collected), it is doubtful that the government will extend the olive branch to noncompliant taxpayers beyond the August 31 deadline this year.

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