Taxpayers with foreign bank and investment accounts they haven’t reported to the U.S. government have a decision to make this week: whether to fess up to their accounts as part of a voluntary disclosure program that ends Sept. 23.
Those who report by the deadline should, in most cases, be able to avoid criminal prosecution and minimize the civil penalties they must pay. But the penalties will still be stiff and some taxpayers are gambling they won’t be found out.
Robert McKenzie, a tax lawyer with Arnstein; Lehr in Chicago, reports he had four clients engage him on Tuesday morning, four more scheduled for office consultations Tuesday afternoon, and telephone calls with prospective clients in between. “It is really hectic,” he says.
Seth J. Entin, a tax attorney with Greenberg Traurig in Miami, is similarly busy. “We’re seeing a lot of people who were sitting on the fence a couple of months ago now deciding to come forward,” he says. “It’s basically the 11th hour,”
The Internal Revenue Service has given no indication that it intends to extend the deadline for the program, which was first announced on March 23. Entin is telling clients: “It would be wise to clean up things right now. It’s unlikely the deal is going to get any better than this.”
Failure to file an annual form with the U.S. Treasury–a form called an FBAR–reporting an interest in a foreign account worth $10,000 or more is a criminal offense. It’s also punishable by a civil penalty of up to 50% of the account’s value, for each year the form goes unfiled. But under the voluntary deal, taxpayers will pay a maximum of 20% of the account’s highest value over the last six years as an FBAR civil penalty. They must also pay six years of back taxes owed on any unreported income from the accounts and six years of accuracy or delinquency penalties related to that unpaid tax.
A taxpayer with an unreported account that at its height in 2003 was worth $1 million could pay $386,000 to come clean under the program, versus $2.3 million if the taxpayer doesn’t come forward and the IRS discovers the account, according to a 52-question Q;A page about the program on the IRS Web site. (The IRS could come after your domestic assets to collect the full penalties, warns Entin.)
The penalties for failure to file an FBAR are based on an account’s balance each year. So even if the account hasn’t been generating income, or even if there are losses in it, someone with an undisclosed account can save on penalties by disclosing it the IRS.
In addition, failing to admit to a foreign account worth more than $10,000 on a 1040 individual tax return is also a felony. But under a longstanding IRS policy, taxpayers who enter into a voluntary disclosure before the IRS begins to audit or investigate them are usually not prosecuted.
There’s been an intense spotlight on secret foreign bank accounts since December 2007, when billionaire California real estate developer and Forbes 400 member Igor M. Olenicoff pleaded guilty to a felony and agreed to pay $57 million in back taxes, interest and civil fraud penalties for failing to disclose his offshore accounts.
Later, Bradley Birkenfeld, a former private banker with Switzerland’s UBS ( UBS – news – people ), pleaded guilty to helping Olenicoff hide more than $200 million offshore. Then, this past February, UBS agreed to pay $780 million in penalties, fines and restitution to the U.S. government to avoid criminal prosecution.
Most significantly for account holders, last month, in an unprecedented breach in Swiss bank secrecy, the Swiss government agreed to turn over to the U.S. the names of 4,450 Americans with secret UBS accounts.
The trail doesn’t end at UBS, however. Accounts at other banks in Switzerland and elsewhere are also at risk of disclosure in coming months and years.
“We are gaining access to more and more information on institutions and individuals involved in offshore tax Taxpayers with foreign bank and investment accounts they haven’t reported to the U.S. government have a decision to make this week: whether to fess up to their accounts as part of a voluntary disclosure program that ends Sept. 23.
Those who report by the deadline should, in most cases, be able to avoid criminal prosecution and minimize the civil penalties they must pay. But the penalties will still be stiff and some taxpayers are gambling they won’t be found out.
Robert McKenzie, a tax lawyer with Arnstein; Lehr in Chicago, reports he had four clients engage him on Tuesday morning, four more scheduled for office consultations Tuesday afternoon, and telephone calls with prospective clients in between. “It is really hectic,” he says.
Seth J. Entin, a tax attorney with Greenberg Traurig in Miami, is similarly busy. “We’re seeing a lot of people who were sitting on the fence a couple of months ago now deciding to come forward,” he says. “It’s basically the 11th hour,”
The Internal Revenue Service has given no indication that it intends to extend the deadline for the program, which was first announced on March 23. Entin is telling clients: “It would be wise to clean up things right now. It’s unlikely the deal is going to get any better than this.”
Failure to file an annual form with the U.S. Treasury–a form called an FBAR–reporting an interest in a foreign account worth $10,000 or more is a criminal offense. It’s also punishable by a civil penalty of up to 50% of the account’s value, for each year the form goes unfiled. But under the voluntary deal, taxpayers will pay a maximum of 20% of the account’s highest value over the last six years as an FBAR civil penalty. They must also pay six years of back taxes owed on any unreported income from the accounts and six years of accuracy or delinquency penalties related to that unpaid tax.
A taxpayer with an unreported account that at its height in 2003 was worth $1 million could pay $386,000 to come clean under the program, versus $2.3 million if the taxpayer doesn’t come forward and the IRS discovers the account, according to a 52-question Q&;A page about the program on the IRS Web site. (The IRS could come after your domestic assets to collect the full penalties, warns Entin.)
The penalties for failure to file an FBAR are based on an account’s balance each year. So even if the account hasn’t been generating income, or even if there are losses in it, someone with an undisclosed account can save on penalties by disclosing it the IRS.
In addition, failing to admit to a foreign account worth more than $10,000 on a 1040 individual tax return is also a felony. But under a longstanding IRS policy, taxpayers who enter into a voluntary disclosure before the IRS begins to audit or investigate them are usually not prosecuted.
There’s been an intense spotlight on secret foreign bank accounts since December 2007, when billionaire California real estate developer and Forbes 400 member Igor M. Olenicoff pleaded guilty to a felony and agreed to pay $57 million in back taxes, interest and civil fraud penalties for failing to disclose his offshore accounts.
Later, Bradley Birkenfeld, a former private banker with Switzerland’s UBS ( UBS – news – people ), pleaded guilty to helping Olenicoff hide more than $200 million offshore. Then, this past February, UBS agreed to pay $780 million in penalties, fines and restitution to the U.S. government to avoid criminal prosecution.
Most significantly for account holders, last month, in an unprecedented breach in Swiss bank secrecy, the Swiss government agreed to turn over to the U.S. the names of 4,450 Americans with secret UBS accounts.
The trail doesn’t end at UBS, however. Accounts at other banks in Switzerland and elsewhere are also at risk of disclosure in coming months and years.
“We are gaining access to more and more information on institutions and individuals involved in offshore tax evasion, and you can expect us to use all of our enforcement tools to stop this abuse,” IRS Commissioner Doug Shulman said last month, when he announced the indictment of a Swiss banker at the Neue Zuercher Bank and a Swiss lawyer who worked with him.
So who’s been confessing and who’s holding back?
Clients who have unreported income from other sources–not just the interest or investment earnings on the undisclosed foreign account–have been the most reluctant to enter into a voluntary disclosure with the IRS, McKenzie says. The reason is that to qualify for the program, they must come clean on everything, meaning they have to pay back taxes, interest and penalties on six years of unreported income as well.
One client who had a change of heart and asked McKenzie to file a report for him had two years of bonuses totaling $280,000 paid by a European employer into a Swiss account.
At the other extreme, McKenzie is filing the paperwork for a woman whose 92-year-old dad recently told her, on his deathbed, that he had set up an offshore account for her. Under the IRS guidelines for the program, she could be assessed a lighter penalty–5% instead of the 20% of highest balance–because she didn’t open the account herself and she hasn’t touched it.
Folks with inherited accounts might be able to get the 5% deal too. But McKenzie says it’s rare they qualify, since heirs will usually take a trip to Europe and raid the account, thus opening themselves up to the stiffer 20% of account balance penalty.
To qualify for the program, taxpayers must apply by Sept. 23; have income from entirely legal sources (no drug dealers or bookies); must cooperate fully with the IRS, including identifying any lawyers or bankers who assisted them; and must make good-faith arrangements to pay the back taxes and penalties. It’s OK if you don’t have all your records (if you haven’t been on a trip to Switzerland lately); you just have to get your foot in the door by the deadline.
All disclosure cases start at the IRS’ criminal division, which then forwards the cases to the civil division. A taxpayer already under audit–even if it’s for something like inflated business expense deductions unrelated to the offshore accounts–can’t participate in the disclosure program.
There are still some taxpayers who are choosing not to go forward with disclosure, notes McKenzie. In most cases, these are taxpayers with other unreported income. “They are rolling the dice that their names won’t come out,” he says. That’s a high stakes gamble.
Says Entin: “The bottom line of the voluntary disclosure is so you can sleep at night.”
evasion, and you can expect us to use all of our enforcement tools to stop this abuse,” IRS Commissioner Doug Shulman said last month, when he announced the indictment of a Swiss banker at the Neue Zuercher Bank and a Swiss lawyer who worked with him.
So who’s been confessing and who’s holding back?
Clients who have unreported income from other sources–not just the interest or investment earnings on the undisclosed foreign account–have been the most reluctant to enter into a voluntary disclosure with the IRS, McKenzie says. The reason is that to qualify for the program, they must come clean on everything, meaning they have to pay back taxes, interest and penalties on six years of unreported income as well.
One client who had a change of heart and asked McKenzie to file a report for him had two years of bonuses totaling $280,000 paid by a European employer into a Swiss account.
At the other extreme, McKenzie is filing the paperwork for a woman whose 92-year-old dad recently told her, on his deathbed, that he had set up an offshore account for her. Under the IRS guidelines for the program, she could be assessed a lighter penalty–5% instead of the 20% of highest balance–because she didn’t open the account herself and she hasn’t touched it.
Folks with inherited accounts might be able to get the 5% deal too. But McKenzie says it’s rare they qualify, since heirs will usually take a trip to Europe and raid the account, thus opening themselves up to the stiffer 20% of account balance penalty.
To qualify for the program, taxpayers must apply by Sept. 23; have income from entirely legal sources (no drug dealers or bookies); must cooperate fully with the IRS, including identifying any lawyers or bankers who assisted them; and must make good-faith arrangements to pay the back taxes and penalties. It’s OK if you don’t have all your records (if you haven’t been on a trip to Switzerland lately); you just have to get your foot in the door by the deadline.
All disclosure cases start at the IRS’ criminal division, which then forwards the cases to the civil division. A taxpayer already under audit–even if it’s for something like inflated business expense deductions unrelated to the offshore accounts–can’t participate in the disclosure program.
There are still some taxpayers who are choosing not to go forward with disclosure, notes McKenzie. In most cases, these are taxpayers with other unreported income. “They are rolling the dice that their names won’t come out,” he says. That’s a high stakes gamble.
Says Entin: “The bottom line of the voluntary disclosure is so you can sleep at night.”
CPA4GPR 