Several years ago the Justice Department subpoenaed names of Americans who had Visa and MasterCard accounts with offshore banks. The IRS then offered these taxpayers a choice, come forward voluntarily and we will waive criminal prosecution and some monetary penalties, or wait until we get to you and then take the risk of criminal penalties.
We have always assumed that once the DOJ successfully subpoenas names from UBS and Credit Suisse, they will take a similar approach. After all, it is impractical to access criminal penalties against thousands of people. They did not disappoint.
The IRS announced last week their plan of action with respect to those thousands of Americans who have undisclosed foreign bank accounts.
1. The IRS will not prosecute those taxpayers who come forward voluntarily. 2. They will not access the 35% penalty against taxpayers not disclosing assets in a foreign trust (that is 35% of the assets in the trust). 3. The FBAR form (form used to disclose foreign bank accounts) penalty will be reduced to between 5-20%. The current penalty is 50% of the highest annual balance in the foreign account, for each of the three preceding tax years. This means that under the existing penalty, for each year a taxpayer is required to disclose a foreign bank account and does not, the federal government can impose a penalty equal to 50% of the highest balance in the account for that year. This penalty can easily exceed the balance in the account. The new lower penalty will be determined with reference to the source of funds in the account. For example, a 5% penalty will be applied if the funds in the account are inherited. A 20% penalty will be applied if the funds in the account are pre-tax earnings. The penalty will also be levied only once, on the highest balance in the account over the past 6 years. 4. Taxpayers would still have to pay back taxes and interest over the past 6 years on the unreported income, and a 20% negligence penalty on top of that. This will be accomplished by means of filing amended returns for the past 6 years. The unreported income would presumably include both the pre-tax monies that went into the account and the earnings generated within the account. 5. The window of opportunity to take this deal is 6 months. 6. Ratting out your friendly Swiss banker, accountant or lawyer is, surprisingly, not a requirement to taking the deal.
There are thousands of Americans with offshore bank accounts. That in itself is not illegal. Not disclosing the accounts to the U.S. government is illegal, and in this economy, not smart. They do need your money to bail out G.M. and company.
For some taxpayers the above deal may result in a fantastic result. For many others, they will lose most money accumulated offshore. We strongly caution all taxpayers with offshore accounts to consult with their tax counsel before taking the deal and exploring all available options.
