Topic: Foreign Accounts
The resurrection of the Offshore Voluntary Disclosure Program (OVDP) for 2012 evidences the continued crack down on taxpayers with undisclosed foreign accounts. According to IRS Commissioner Doug Shulman, “People are finding it tougher and tougher to keep their assets hidden in offshore accounts.” Under the first two programs 33,000 disclosures were made that resulted in the collection $5 billion in back taxes. But more worrisome is the hefty civil penalties, fines, and possibility of jail time that taxpayers face if uncovered. Since the stakes are so high, taxpayers may find themselves wanting to sweep the issue away by discarding their foreign accounts.
Staying hidden forever is doubtful, so why not close the account and avoid the system altogether? Although tempting, at most a taxpayer is cutting off liability for future periods. To illustrate, if a taxpayer were to close his or her account tomorrow there is still income and reporting obligations from past years and even up to the closure date in the current year. Under the Internal Revenue Code there is a 6-year applicable statute of limitations. Moreover, quietly closing a foreign account and disposing the funds gives off the appearance of a consciousness of guilt and an additional badge of fraud. Therefore, just closing your foreign account isn’t a solution.
Clearly, the problem won’t go away on it’s own. The best choice for taxpayers is voluntary disclosure. The voluntary disclosure program is designed to make strong progress in international compliance efforts that help ensure honest taxpayers are not footing the bill for those hiding assets offshore. To do so, the revived 2012 disclosure program has implemented some different wrinkles. Under the law, if a taxpayer challenges in a foreign court the disclosure of tax information by that government, the taxpayer is required to notify the U.S. Justice Department of the appeal. If the taxpayer fails to comply with this law and does not notify the U.S. Justice Department of the foreign appeal, the taxpayer will no longer be eligible for the Offshore Voluntary Disclosure Program. Further, eligibility for OVDP can be terminated once the U.S. government has taken action in connection with the taxpayer’s specific financial institution.
This program – which helps bring people back into the tax system — will be open for an indefinite period until otherwise announced. Moving forward taxpayers must file a FBAR (Report of Foreign Bank and Financial Accounts) and report all foreign income earned.