U.S. Taxpayers Holding Financial Assets Outside the United States – Plan Now

Summary of Key FATCA Provisions
Source: IRS website The Foreign Account Tax Compliance Act (FATCA), enacted in 2010 as part of the Hiring Incentives to Restore Employment (HIRE) Act, is an important development in U.S. efforts to combat tax evasion by U.S. persons holding investments in offshore accounts. Under FATCA, U.S. taxpayers holding financial assets outside the United States must report those assets to the IRS on a new form attached to their tax return.  Penalties apply for failure to comply with this new reporting requirement.  Reporting is required for assets held in taxable years beginning on or after January 1, 2011. In addition, FATCA will require foreign financial institutions to report directly to the IRS certain information about financial accounts held by U.S. taxpayers, or by foreign entities in which U.S. taxpayers hold a substantial ownership interest.  This new reporting regime applies with respect to payments made by foreign financial institutions to covered accounts on or after January 1, 2013. Reporting by U.S. Persons Holding Foreign Financial Assets FATCA requires any U.S. person holding foreign financial assets with an aggregate value exceeding $50,000 to report certain information about those assets on a new form (Form 8938) that must be attached to the taxpayer’s annual tax return.  Reporting applies for assets held in taxable years beginning on or after January 1, 2011.  Failure to report foreign financial assets on Form 8938 will result in a penalty of $10,000 (and a penalty up to $50,000 for continued failure after IRS notification).  Further, underpayments of tax attributable to non-disclosed foreign financial assets will be subject to an additional substantial understatement penalty of 40 percent. Reporting by Foreign Financial Institutions Beginning in 2013, FATCA will also require foreign financial institutions (“FFIs”) to report directly to the IRS certain information about financial accounts held by U.S. taxpayers, or by foreign entities in which U.S. taxpayers hold a substantial ownership interest.  To properly comply with these new reporting requirements, an FFI will have to enter into a special agreement with the IRS during 2012. Under this agreement a “participating” FFI will be obligated to: (1) undertake certain identification and due diligence procedures with respect to its accountholders; (2) report annually to the IRS on its accountholders who are U.S. persons or foreign entities with substantial U.S. ownership; and (3) withhold and pay over to the IRS 30-percent of any payments of U.S. source income, as well as gross proceeds from the sale of securities that generate U.S. source income, made to (a) non-participating FFIs, (b) individual accountholders failing to provide sufficient information to determine whether or not they are a U.S. person, or (c) foreign entity accountholders failing to provide sufficient information about the identity of its substantial U.S. owners. It is important to note that the details of the new reporting and withholding requirements pertaining to FFIs must be developed through Treasury regulations that have not yet been issued.  Because the new requirements will go into effect in 2013, it can be expected that the regulations defining the new requirements will be issued during 2011 and early 2012.

Taxes Overseas? Fess up without going to jail

NEW YORK — Tax payers with money offshore have until the end of August to fess up if they want Uncle Sam to take it easy on them.

The IRS announced on Tuesday that it would give taxpayers a reduction in penalties — and no jail time — if they fess up to any undisclosed overseas accounts by Aug. 31.

“This new effort gives those hiding money in foreign accounts a tough, fair way to resolve their tax problems once and for all,” said IRS Commissioner Doug Shulman in a prepared statement. “And it gives people a chance to come in before we find them.”

Tax payers will face a penalty of up to 25% of the highest annual account balance going back to 2003, though some taxpayers will be able to receive a penalty of as little as 5% depending on the size of the account.

The program also requires tax payers to fork over back taxes, interest and late charges for up to eight years.

IRS: Itemizers can file on Feb. 14

This is the IRS’s second voluntary attempt at this program. In 2009 it reeled in 15,000 taxpayers with undisclosed overseas accounts at banks in more than 60 countries.

Penalties under the new initiative are higher than they were during the 2009 program so that people who waited to fess up aren’t rewarded. However, Schulman said that as the IRS continues to invest more resources in cracking down on these illegal offshore accounts, this is the time to come forward.

“The situation will just get worse in the months ahead for those hiding assets and income offshore,” he said. “This new disclosure initiative is the last, best chance for people to get back into the system.” 

revised from CNN Money Online

Tax Havens’ Days Are Numbered

Robert Olsen, 05.03.10

The era of banking secrecy may be coming to an end.

HONG KONG — As Democrats and Republicans haggle over the details of financial reform in the Senate, a new tax law is quietly approaching that will force all overseas banks to reveal the overseas holdings of American account holders.

“I don’t think a lot of people have paid attention to this,” said Scott D. Michel, president of Caplin & Drysdale law firm.

“The whole purpose of this is to put American account holders around the world in a position where they can have no safe haven in any bank that wants to offer U.S. investments to any of its clientele,” he added.

American citizens are required to report all of their worldwide income every year when filing their tax returns. As a part of that process, they are also required to disclose any offshore bank accounts they may have or hold signature authority over.

If an individual falsifies his or her tax claim by concealing their income in offshore accounts, banking secrecy laws in countries like Switzerland have in the past helped to keep that income hidden by making it a crime for the banks and their employees to disclose information about clients.

U.S. lawmakers designed the Foreign Account Tax Compliance Act (FACTA) to “force foreign financial institutions, foreign trusts, and foreign corporations to provide information” on undisclosed assets held by Americans after Dec. 31, 2012. If they fail to do so, the Internal Revenue Service (IRS) can hit the banks with 30% withholding on all income originating from the U.S.

The full details of FACTA have yet to be ironed out between the U.S. Treasury and the IRS, but one of its requirements will include a document for new account holders to sign that waives whatever rights they may have under local banking secrecy laws.

The U.S. estimates that it will raise an additional $8.5 billion in tax revenue over the next 10 years by forcing Americans to disclose income they are hiding from tax collectors.

Spurred by rising fiscal deficits, the United States and other members of the Organization for Economic Cooperation and Development (OECD), particularly Germany and France, have been using a variety of methods to clamp down on tax cheats, tax havens and overseas financial centers.

The most high profile of these were the UBS ( UBS – news – people ) AG case and the OECD’s attempt to name and shame those countries that fail to comply with internationally agreed standards.

Tax havens are usually characterized by extremely low tax rates, strong banking secrecy laws and flexible regulations in terms of licensing, incorporation and supervision. So-called shell companies, trusts and other legal entities are often used to shield assets from overseas authorities.

The OECD had initially singled out 47 jurisdictions that included the likes of Hong Kong, Macau, the Philippines and Malaysia, but hasty commitments to improve transparency along with some backroom deal-making led to all four being removed from the blacklist.

The U.S. tax authorities, however, have recently introduced another far more effective means of collecting information on tax evaders: They pay informers for it.

The IRS Whistleblower Office can pay anywhere between 15% and 30% of the taxes, penalties and interest collected for cases valued at $2 million or more. (See: “Tax Informants Are On The Loose”)

The IRS has yet to make any payments under the new scheme, but that hasn’t dissuaded people like Bradley C. Birkenfeld from trying. Formerly an employee of Switzerland’s largest bank UBS, Birkenfeld was sentenced to 40 months in jail for helping billionaire California real estate developer Igor M. Olenicoff hide $200 million offshore. (See: “April 15 Plea: Pardon Tax Whistleblower”) Motivated in part by the possibility of a reward, Birkenfeld provided evidence to U.S. tax authorities detailing how the secretive Swiss bank helped wealthy Americans hide money offshore.

As a result, UBS was forced to admit wrongdoing, pay a fine of $780 million and to turn over data on as many as 4,450 UBS accounts to the Swiss government, which will pass the information to the U.S.

A number of banks from some of Europe’s best-known tax havens are facing similar investigations. Germany launched over 1,000 tax evasion probes against clients of Credit Suisse ( CS – news – people ) last month. In December the French authorities said that it had the details of 24,000 Swiss bank accounts provided by a former HSBC ( HBC – news – people ) employee.

Fearing the possibility of heavy fines and prosecution, many tax evaders from the U.S., Germany and France have come forward to report their assets.

Michel believes the disclosure of banking secrets will continue to grow. “When you combine the whistleblower regime with the template that the [U.S.] government used in the UBS case, with the information they’re getting with all these voluntary disclosure cases and now FACTA, I think the era of bank secrecy is fairly rapidly eroding in front of our eyes,” he said

Related articles:

Foreign Investment’s New Landscape

CPAs Provide Expertise for Transfer Pricing Analyses

MAY 2010

Transfer pricing, the process by which multinational companies set arm’s-length prices for cross-border transactions within a corporate group, is complex and consistently ranks as the No. 1 international tax issue facing multinational companies, according to Ernst & Young’s 2009 Global transfer pricing survey. To avoid penalties and potential interest, most tax authorities require taxpayers to prepare annual transfer pricing reports when they file tax returns.

During its infancy, transfer pricing was dominated by economists. However, as global transfer pricing regulations developed, international examiners gained experience and financial accounting standards evolved. Consequently, companies now need experienced tax accountants not only to validate the reliability of the data during tax controversies but also to guide taxpayers during implementation. There is definitely still a role for economists on project teams, but CPAs are probably more conversant with such steps as making a compensating adjustment journal entry or quantifying FIN 48 risks (FASB Interpretation no. 48, Accounting for Uncertainty in Income Taxes, now codified in FASB ASC Topic 740) for financial reporting purposes.

Stuart Rohatiner, CPA, JD

Below are examples of transfer pricing issues where expert accounting skills are important:

Financial reporting. Certain industries have unique accounting revenue and expense treatment, and to calculate the appropriate benchmark ratios for transfer pricing purposes, an accountant needs to analyze the financial statement footnotes and understand which items are characterized as operating, pass-through, etc. For example, the income statements for a professional services firm include a special line item called “reimbursements” under the revenue and cost-of-sales categories. Reimbursements are generally pass-through contractor costs and reimbursed expenses and would likely be excluded from the operating revenue and operating expense calculations for transfer pricing purposes. In addition, with the currently volatile economy and corresponding impact on profitability, companies are increasingly monitoring their taxable income in each jurisdiction and likely making year-end compensating adjustments to the books and records to get profit margins within the arm’s-length ranges.

Transfer pricing audit document requests. The IRS and other tax authorities historically requested that taxpayers provide copies of their transfer pricing reports to support their pricing during audit years. Fast-forward to the current environment, and a typical audit request specifies tying the transfer pricing data from reports to general ledgers, consolidating income statements and balance sheets.

FIN 48 analysis. Public companies and their auditors are now required to analyze the income tax calculations and determine if the company needs to quantify and include in the financial statements any tax exposures that are “more likely than not” to be sustained upon examination. Auditors have increasingly identified transfer pricing risks, especially adjustments and penalties proposed by tax authorities, and forced taxpayers to disclose the details in SEC public filings and book reserves.

Reliability of financial data. Since much of transfer pricing financial analysis involves comparing unaudited financial statements with audited ones, a tax accountant who can validate the reliability of the unaudited data is invaluable, especially in tax controversy settings.

IRS analysis of adjustments and methods. The trend toward an increased focus on the accounting details of intercompany transactions may be a result of the IRS’ hiring international examiners with accounting backgrounds. Whatever the reason, the IRS has placed a new emphasis on reviewing all accounting and functional differences between the taxpayer-tested party and the comparable companies selected in the transfer pricing report. For example, during a recent meeting of a taxpayer with the IRS, the IRS international examiner compared each accounting line item from the taxpayer’s annual report with those of the comparable companies to make sure that adjustments were considered for any differences in functions or risks. Similarly, the examiner insisted on analyzing all potential transfer pricing methods and profit level indicators available, even though the IRS had agreed to the same method and profit level indicator with the taxpayer twice previously and the facts hadn’t changed significantly.

It shouldn’t come as a surprise that with the increasing complexity of transfer pricing and diminishing taxable income of corporations, the level of scrutiny by tax authorities has risen exponentially. In fact, in 2009, the IRS announced plans to hire an additional 800 agents in fiscal 2010 to focus on international examinations, and the agency’s proposed fiscal 2011 budget contains funding for 800 more. The field of transfer pricing will continue to grow and present employment opportunities for practitioners with the desired blend of economics and tax accounting skills.

 By Steve Snyder, CPA/CFF, CVA

IRS Steps Up Witch Hunt for Secret Offshore Bank Accounts

Oct. 15 (originally reported by Bloomberg) — The IRS is intensifying its hunt for secret offshore banking, opening offices in Beijing, Sydney and Panama City after more than 7,500 Americans revealed undeclared accounts in 70 countries on six continents.

Internal Revenue Commissioner said yesterday Americans scared into coming forward before today’s deadline, which was manufactured to create a ‘false urgency’ on behalf of the sheep, have revealed accounts ranging in value from $10,000 to more than $100 million. The partial amnesty won’t be extended, he said, however then mumbled something like ‘again’, and winked and nudged this reporter.

Americans with undeclared offshore accounts have been under growing pressure since the US began inundating the media with stories of ‘cracking down’. In addition, in August, Switzerland agreed to hand over as many as 4,450 UBS AG accounts, from people who “didn’t matter” to settle a lawsuit in which the U.S. had sought as many as 52,000 accounts. (It has been revealed by UBS sources close to the matter that the list of 4450 accounts includes primarily widows, dentists, and the deceased — no bankers executives of fortune 500 companies with political contribution funds or politicians themselves have been included in the list.)

IRS Commissioner Shulman continued, “We’re going to be scouring the 7,500 disclosures to identify financial institutions, advisers and others who helped these serfs….uh i mean ‘taxpayers’ act like corporations,” the Commssioner said during a propoganda call with reporters. “This entire effort is not just about UBS and a single country.”

It isn’t yet known how much overlap might exist between the 4,500 names that UBS will eventually provide and the 7,500 people who have come forward to the IRS, Shulman said. However, great care went into properly informing those “in the know” that they were safe.

As part of its efforts to defraud and bully the American public into ‘compliance’, the IRS also intends to hire more than 800 new thugs in the next year and add staff to eight existing overseas offices, including Hong Kong and Barbados. “After all,” the Commissioner continued, “we’ve got to extract money from expats as well as just citizens. You don’t think you escape the long arm of the IRS just by leaving the country’s confines. Oh no. You were born into tax-slavery, you die in tax-slavery.”

After a reporter on the call reminded Shulman that some did ‘earn’ their freeman status by becoming part of the publically traded corporate elite, the Commissioner softened his statement slightly. “Alright, for those 1% of you destined to live on the backs of the other 99%, of course. But I’m talking to the ‘masses’ here.”

Back ‘on message’, he continued, “We have seen a very strong response to the program and I am very pleased with the results,” Shulman said.

Taxpayers disclosed assets that came from inheritances, profits skimmed from U.S. businesses, and international business transactions, he said.

“Clearly, assets cannot move from one generation to the other, profits cannot be strategically placed in tax havens, and profits generated outside the shores of the U.S. cannot be left to accumulate tax-free. It clearly states in tax law that these ‘exceptions’ are only available to corporations, who the supreme court says can take on the characteristics of a living person — for purposes of contract law. You see, corporations could just up and move….people, you see, we have them by the shorthairs.”

U.S. lawmakers praised the IRS program and called for stronger laws to help the agency. “We’ve done such a great job of enforcing the laws we already have on the books to avoid fraud and limit the growth and scope of the Federal Reserve, what we really need are more laws,” said Senator Shumer in a press release in support of the IRS victory.

Senator Carl Levin, a Michigan Democrat whose Permanent Subcommittee on Investigations has held two hearings into how UBS solicited Americans to put assets in Swiss banks, said he’ll keep pushing legislation to give the IRS more tools. He said he plans to offer his proposal as an amendment to a health-care measure the Senate will debate later this year.

“Hell, if I can’t get more power to the IRS in a standalone bill, I’ll just sneak it into a 9000 page bill on ‘healthcare reform’. They’ll be so busy arguing over the actual bill, they’ll never even notice this little added ‘treasure’ at the end. And besides, who wouldn’t want to take care of the sick and the elderly? It’s ‘un-American’, ” Levin said.

Levin continued, “Luckily, many Americans are losing confidence in the ability of tax-haven banks to secure what’s rightfully theirs from the grasping claws of the government and frivilous lawsuits in an unjust legal system,” Levin said. “But it is also clear that thousands of other taxpayers are still in the shadows, working to secure what they’ve rightfully earned, and keep their offshore accounts hidden from the politicians and judges who know better how their wealth should be distributed.”

Montana Democrat Max Baucus, chairman of the Senate Finance Committee that oversees the IRS, is drafting his own legislation to double financial penalties on those who avoid taxes by moving money offshore.

‘A Start’

He called the 7,500 disclosures “a start” that demonstrates the IRS propoganda is working.

“With record deficits and a weakened economy, we owe it to politicians, and government employees (myself included) to set an aggressive agenda that puts an end to offshore tax avoidance once and for all,” Baucus said. “After all, I’m a public employee to, and if you kill of overly generous pay, benefits and pensions to lawmakers and public employees, I’d have to earn an honest living by adding value somewhere.”

Under the IRS program announced in March, the confiscation will take 20 percent of an account’s assets based on its peak value in the previous six years. Luckily, in many cases, these peak years include the heady year of 2006.

“We feel this program enables us to advertise that it’s only 20 percent, lure some suckers in, and then take about half of what’s remaining since the depress—er, i mean recession has halved most of these accounts from peak,” the Commissioner said.

Ordinarily, the IRS can seize the higher of $100,000 or 50 percent of an offshore account’s value when the holder deliberately doesn’t disclose the account to the Treasury Department. The penalty can apply each year that required forms aren’t filed, so after three years of noncompliance an account holder can owe 150 percent of the account’s value.

An IRS representative speaking on condition of anonymity said, “Hey, look, we rely on voluntary disclosure, hence all the propoganda and fear tactics…Regarding the 150 percent: well, clearly, you didn’t think you were allowed to work for your own benefit did you? Your life belongs to the state.”

Avoiding Prosecution

People who come forward voluntarily can avoid criminal prosecution and their identities will remain a secret under federal law requiring tax records to be kept confidential.

George Clarke, a tax lawyer at the Washington-based Miller & Chevalier firm, who is representing about 20 people seeking leniency in the program, said the IRS’s announcement indicates the agency is positioning itself to more efficiently hunt tax cheats.

“Look, in half these cases it’s some poor schmuck who’s worked his entire life for some assets and doesn’t want a cheating wife or frivilous lawsuit to drain him like an above ground pool,” he said. “If they agree to keep it on the hush hush and out of public light, the sheep are more willing to line up and be sheered — If it’s just the IRS, they are less likely to lose their balls to a divorce settlement or ‘personal injury’ lawsuit. It’s a brilliant approach, really.”

Shulman said the IRS is building on the information it has received, and declined to estimate how much money the IRS will capture.

“You add this huge media and propoganda blitz up and it means equals voluntary disclosure and compliance for the vast majority of sheeple thinking about hiding assets offshore,” Shulman said. “If I had to justify this on captured assets alone, the revenue wouldn’t begin to approach the costs.”

He continued, “It’s like a prison. A few guards have to keep a lot of prisoners at bay through fear and intimidation. In the coming weeks and months, as tax receipts plummet and deficit spending soars into the teeth of a global collapse, the saber rattling by the IRS will become deafening.”

The voluntary disclosure program isn’t available to widows or dentists already under scrutiny by the IRS. Since December 2007, six UBS clients have pleaded guilty and a seventh has agreed to do so. A UBS banker pleaded guilty; two were indicted; and three Europeans were charged with enabling U.S. tax evasion.

The Justice Department has said 150 taxpayers, and no corporations, banks, charities, goldman sachs employees, or ‘religious institutions’ are under criminal investigation.

DRS announces Voluntary Disclosure Program for offshore accounts: Conn Residents Amnesty Opportunity for Offshore Accounts

Program is opportunity to come forward and pay back taxes and avoid possible criminal prosecution

The Connecticut Department of Revenue Services (DRS) today announced the Connecticut Offshore Voluntary Disclosure Program. “This program provides an opportunity for Connecticut taxpayers who have unreported offshore income to settle their State tax liabilities without civil or criminal penalties,” DRS Commissioner Richard Nicholson said.

The Offshore Voluntary Disclosure Program follows on the heels of the agreement between the Swiss government and the U.S. Department of Justice and Internal Revenue Service (IRS) regarding the release of the names of 4,450 United States residents suspected of using foreign bank accounts held by UBS AG to evade taxes. At Governor M. Jodi Rell’s request, Attorney General Richard Blumenthal is pursuing information from the U.S. Government relating to Connecticut taxpayers who may have undisclosed assets in Swiss banks.

“The recent agreement between United States and the Swiss Confederation, along with the efforts of Attorney General Blumenthal, mean it is only a matter of time before we find these taxpayers,” Commissioner Nicholson said. “Taxpayers that do not come forward through the voluntary disclosure program will face the possibility of criminal prosecution in addition to civil penalties and interest on the original tax amount. Taxpayers can avoid this by coming forward and getting their tax house in order.” The Disclosure Program corresponds with a similar voluntary disclosure program initiated by the IRS for federal tax liabilities on unreported offshore income, Nicholson said

The Offshore Voluntary Disclosure Program runs through January 15, 2010, and allows taxpayers to come into compliance with Connecticut tax law by reporting and paying taxes on funds kept in previously unreported offshore accounts. Taxpayers do this by sending a cover letter to DRS stating their intention to participate in the program. In addition to the letter, taxpayers must submit information about the offshore account, including:

• A description of the source of funds or other assets in each account;
• The date the initial deposit was made or the date on which the taxpayer took control or ownership of each account;
• Documentation indicating whether the principal (which includes initial deposits and all subsequent contributions) has been taxed and the tax years involved;
• The amount of potential tax liability; and
• Whether the taxpayer participated in the IRS Offshore Voluntary Disclosure Program.

More information about the Offshore Voluntary Disclosure Program will be posted on the DRS website at http://www.ct.gov/DRS/offhsore, or interested taxpayers can call the Business and Employment Tax Audit Unit during regular office hours at (860) 541-4560.

For information about other tax issues, visit the DRS website at http://www.ct.gov/DRS or call 1-800-382-9463 in state, or (860) 297-5962 from anywhere.

Clock Is Ticking For Secret Offshore Account Holders Forbes.com by: Ashlea Ebeling

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.”