IRS to Pursue "Quiet" Disclosure of Foreign Income

US taxpayers have different reasons for not disclosing their foreign bank accounts (by filing FBARs). While some taxpayers are intentionally hiding foreign income to avoid paying US taxes, many just don't know that they are required to disclose their account and pay taxes on the interest income. Some of these individuals are foreign born US citizens maintaining a bank account in their country of origin. Others are US citizen living overseas. Uninformed or not, during the last few years the US government has made it a priority to crack down on offshore tax evasion. 

As part of this effort, the US enacted the Foreign Account Tax Compliance Act which requires foreign financial institutes to report to the IRS information about financial accounts held by U.S. taxpayers. As a result of this enactment, the risk of an audit for individuals with foreign bank accounts increased substantially. 

In 2009, the IRS introduced its first Offshore Voluntary Disclosure Program (OVDP) to encourage individuals to voluntarily disclose their foreign bank accounts. As part of the deal offered by the program, the IRS agreed not to audit or criminally prosecute these individuals in exchange for the payment of taxes, penalties and interest on any undisclosed income and a one time 20% penalty on the highest balance in the foreign bank account (lower penalties are available if special circumstances are met). Due to the success of the first OVDP, the IRS reintroduced the OVDP in 2010 with a 25% highest balance penalty and in 2011 with a 27.5% penalty. 

As the penalties under the OVDP increase each year, more taxpayers are opting to instead come clean through a "quiet" disclosure. A "quiet" disclosure" means that taxpayers amend their past tax returns and FBARS without actually coming forward under the OVDP and paying the penalty on the highest balance. As a result, the government misses out on billions of dollars in revenue. 

This month, the Government Accountability Office (GAO), the "congressional watchdog," issued a report urging the IRS to pursue those taxpayers making "quiet" disclosures. The report, titled Offshore Tax Evasion. IRS Has Collected Billions of Dollars, but May be Missing Continued Evasion, found that as of December 2012, the OVDP programs have resulted in over 39,000 disclosure and over $5.5 billion in revenue. Furthermore,while the IRS has also detected some taxpayers trying to avoid paying taxes, interest and penalties, many attempts have been missed. The GAO found many more potential "quiet" disclosures than the IRS detected by analyzing amended returns from 2003-2008 and matching them to available information about taxpayer offshore activities. The GAO concluded that the act of "amending past returns or reporting on current returns previously unreported offshore accounts, results in lost revenue and undermines the programs' effectiveness." 

The GAO recommended that in addition to identifying and educating taxpayers about their reporting requirements, the IRS should "explore options for employing a methodology to more effectively detect and pursue 'quiet' disclosures." The IRS has agreed to adopt these recommendations.  

Currently, in the OVDP question and answer section, the IRS urges taxpayers who have already made a "quiet" disclosure to take advantage of the penalty framework provided by the OVDP. The IRS warns that those taxpayers making a "quiet" disclosure should be aware of the risk of being examined and potentially criminally prosecuted for all applicable years (question #15). 

Although it is uncertain what methodology the IRS will adopt to ferret out "quiet" disclosures, it is likely that the risks may no longer be worth taking. 

This content is not intended as legal advice, and cannot be relied upon for any purpose without the services of a qualified professional.

Recent Development in Foreign Bank Account Reporting

On June 26, 2012, the IRS released information about a new procedure (scheduled to go into effect on September 1, 2012) which will allow some non-resident U.S. citizens to resolve tax issues relating to their foreign bank accounts.  This will affect non-resident U.S. citizens who are behind on filing their U.S. income tax returns and/or disclosing their foreign bank accounts.  

All U.S. citizens, even those who reside abroad, are taxed on their worldwide income.  U.S. citizens with foreign bank accounts are also required to file Reports of Foreign Bank and Financial Accounts (FBARs) if the aggregate value of the accounts exceeds $10,000 at any time during the year.  

If these non-resident U.S. citizens qualify as low compliance risks, they have the option to come into compliance with their filing requirements without having to participate in the Offshore Voluntary Disclosure Program (“OVDP”). The OVDP allows US citizens to voluntarily come forward and report their foreign bank accounts. In order to participate in the OVDP, the U.S. Citizen is required to pay significant penalties calculated on the amount of tax owed and the value of the foreign bank account(s). In exchange, the government promises not to impose fraud penalties and to forgo criminal prosecution.

Under the new procedure, if the IRS determines that the taxpayer presents a low level of compliance risk, the IRS will expedite review of the taxpayer’s submission, will not assert penalties and will not pursue follow-up actions. The downside to this procedure is that the IRS could also determine that a taxpayer’s submission presents a higher compliance risk and is therefore not eligible for the procedure. If this is the case, the IRS will conduct a thorough review of the taxpayer’s information and possibly even a full examination. The taxpayer must make the determination of whether or not he is a low compliance risk taxpayer before he submits the required documents. If the taxpayer’s determination is incorrect, the taxpayer will be treated as if he opted out of the OVDP and chose to quietly disclose his account. This could subject him to substantial penalties and possible criminal prosecution.

In making its determination regarding the level of compliance risk, the IRS will consider the simplicity of the return and the amount of tax due. A taxpayer with simple tax returns and less than $1,500 in tax due in each of the years will most likely be considered a low compliance risk submission. If, on the other hand, the IRS determines that high risk factors are present, the submission may not qualify for the procedure. These risk factors that the IRS considers include, but are not limited to, the income and assets of the taxpayer, any indication of sophisticated tax planning or avoidance, material economic activity in the United States, the amount and source of United States source income and any history of noncompliance with US law. The IRS has stated that additional information regarding these specific factors will be released before this procedure goes into effect.

In order to take advantage of this procedure, the taxpayer must (1) file delinquent tax returns with appropriate related information returns for the past three years (2) file delinquent FBARs for the past six years, (3) provide any additional information regarding compliance risk factors which may be required by future instructions and (4) pay any federal tax and interest due.

Overall, this procedure will provide a welcome alternative to the OVDP to non-resident U.S. citizens who clearly fall into the low compliance risk category. Prior to the announcement of this procedure, these low risk non-residents could either participate in the OVDP and pay substantial penalties or participate in the risky quiet disclosure by filing their delinquent returns and FBARs.  

On the other hand, those taxpayers who are concerned about criminal prosecution should instead take advantage of the OVDP. Unlike the OVDP, this new procedure does not guarantee protection against criminal prosecution. It is important to note that once the taxpayer makes a submission under this new procedure, he can no longer participate in the OVDP. If a taxpayer is ineligible for the OVDP, he would also be ineligible for this procedure.

This content is not intended as legal advice, and cannot be relied upon for any purpose without the services of a qualified professional. 

What You Should Know If You Have A Foreign Bank Account

Currently, the IRS considers international tax enforcement its top priority. Therefore, if you have a foreign bank account, it is extremely important to be aware of your reporting requirements or else be subject to substantial penalties and criminal prosecution.

• The 2012 Offshore Voluntary Disclosure Program ("OVDP") 

On January 9, 2012, the IRS announced its third OVDP.  The purpose of this program is to help people with undisclosed income from foreign accounts become current with their US tax obligations.  The IRS has not yet released additional guidance to assist taxpayers in participating in this program and there is no deadline to participate (currently the guidance in existence is from the 2011 OVDP). 

Only those taxpayer who are not currently under civil or criminal investigation by the IRS may participate in this program. 

For those who choose to participate in this program by making a voluntary disclosure, the IRS promises that significant civil penalties and criminal prosecution will not be imposed.  In order to participate:

1. The taxpayer must file FBARS (see below) and amended income tax returns for the last eight years
2. The taxpayer must pay all income tax owed to the U.S.  plus a 20% accuracy-related penalty and interest for the eight years of returns 
3. The taxpayer must pay 27.5% of the highest aggregate balance in the undeclared foreign account during the past eight years.  There are exceptions to this rule.  

• FBARS

U.S. persons must disclose their financial interests in, signature authority over or other authority over, foreign bank, security or financial accounts if the aggregate value of each account(s) exceeds $10,000 at any time during the year.  This requires the filing of a Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts ("FBAR").  The FBAR is an information return which is filed separately from the taxpayer's income tax return.  The deadline to file an FBAR is June 30th. 

If the IRS determines that a taxpayer's failure to file this form is willful, the IRS can impose substantial civil and criminal penalties.  If the violation is not willful, the penalty shall not exceed $10,000 per violation.  If the failure to file is due to reasonable cause and the account was properly reported, no penalty should be imposed.  

For each willful violation, the IRS shall impose a penalty which is the greater of $100,000 or 50% of the value of the account at the time of the violation (the time of the violation occurs on the due date for filing the FBAR).  A willful violation also subjects the taxpayer to five years in prison and/or a maximum fine of $250,000.  

This content is not intended as legal advice, and cannot be relied upon for any purpose without the services of a qualified professional.  

The IRS Reopens the Offshore Voluntary Disclosure Program for 2012

The IRS has recently announced that it will reopen its Offshore Voluntary Disclosure Program (OVDP) for the third time.  The purpose of this program is to allow people hiding offshore accounts to come clean to the IRS and get current with their taxes. 

The previous two programs resulted in collection of more than $4.4 billion in 2009 and 2011.  The IRS states that it has closed about 95% of the disclosure cases from the 2009 program, collecting $3.4 billion.  The 2011 program has resulted in an additional $1 billion as the IRS continues to process those disclosure cases. Therefore, for those of you who participated in the 2011 OVDP and have not yet heard from the IRS, sit tight. It will probably take another three years before the IRS gets through everyone who participated.  

Since the 2011 program expired in September, hundreds of taxpayers continued to make voluntary disclosures.  In response, the IRS has decided to treat these taxpayers under the provisions of the 2012 OVDP.

Unlike the previous two programs, the 2012 OVDP has no set deadline to expire.  Nevertheless, in return the IRS reserves the right to change the program at any time by increasing penalties or ending it altogether.   

Currently the penalty structure for the 2012 OVDP remains the same except for the taxpayers in the highest penalty category.  Those individuals will have to pay a penalty of 27.5% of the highest aggregate balance in foreign bank accounts/entities or value of foreign assets during the eight tax years prior to disclosure.  This is an increase from the 25% penalty during the 2011 OVDP.  In limited situations and for smaller accounts, some taxpayers will instead be eligible for the 5% or 12.5% penalties (as they were during the 2011 OVDP).   If the taxpayer believes that the penalty is disproportionate, they may opt to be examined by the IRS. 

In order to qualify for the program, taxpayers must file all their original and amended tax returns and include payment for taxes owed, interest, accuracy-related and/or delinquency penalties for up to eight years. 

IRS Commissioner, Doug Shulman, urges people to come clean before the IRS finds them.  He states that “we are following more leads and the risk for people who do not come in continues to increase.” 

This content is not intended as legal advice, and cannot be relied upon for any purpose without the services of a qualified professional.