The United States has come a long way from its past practice of being an isolationist nation, throughout most of the 19th century. With the globalization of trade and the ability to move freely about most of the world, both physically and electronically, the U.S. and other first world countries have had to make legislative changes, accordingly. One of the biggest realities with regard to the globalization of U.S. residents is that although the individual may be physically present domestically, their money may not. When wealth and sources of income lay outside of the U.S., the IRS has struggled to discover it so that it may levy the proper tax. But the proliferation of tax information sharing agreements between nations has allowed the Service to efficiently identify monies and sources of income of residents overseas, and their new found ability is striking fear in U.S. residents with undisclosed foreign accounts or income streams outside of our borders. Causing fears of being discovered hiding money overseas to rise even higher, the IRS recently announced that it would begin information sharing with three new nations, causing the number of countries without an agreement to transmit information with the IRS to shrink even smaller.
As a general matter, U.S. residents are taxed on their worldwide income. This is a departure from most countries who determine tax liability based on a territorial system. In other words, with the exception of the United States, a person will typically be taxed on income in the country that they earn it. But because the U.S. takes a more abrasive, worldwide approach, the IRS has an interest in knowing where your money and income streams are located. The Obama administration has taken steps to build a series of proverbial pipes of information that run from foreign countries directly into the hands of the IRS. The Foreign Account Tax Compliance Act (FATCA) codified the effort of the United States to procure information about U.S. resident’s foreign accounts overseas. Under the FATCA laws, foreign financial institutions must transmit sensitive U.S. account holder information to the United States or face a 30 percent withholding penalty on any transactions that include a U.S. payor. Countries have lined up to partake in the FATCA information sharing program, including Azerbaijan, Jamaica, and Slovak.
In a recent Revenue Ruling, the Department of the Treasury and the IRS have determined that the three nations listed above are suitable to be a part of an automatic exchange relationship under Treasury Regulations § 1.6049-8. One of the hallmarks of the automatic exchange relationship is the transmittal of taxpayer information when a non-resident alien (as defined by the Code) has received more than $10 of interest in any given year. Although most taxpayers here in the United States do not fall into the nonresident alien class, any taxpayer with a foreign bank account or asset stream should be aware of these developments. Consultation with an experienced tax attorney is recommended if a taxpayer has a foreign bank account that has not been disclosed to U.S. taxing authorities.
The Foreign Bank Account Reporting (FBAR) laws require any American taxpayer to disclose the existence of a foreign bank account with a high-balance of $10,000 or more during the tax year. Willful failure to comply with FBAR laws can result in hefty financial penalties and a federal prison sentence. Although the government traditionally had trouble identifying and tracking down taxpayers and their undeclared foreign accounts, FATCA compliance (discussed above) and intergovernmental agreements (IGA’s) have provided the IRS with enough information to begin extensive criminal prosecutions of FBAR violators. With most countries having entered into agreements to share tax information with the United States, the ability of a taxpayer to feel comfortable in the secrecy of their foreign bank account is quickly diminishing.
Although the future looks grim for taxpayers with undeclared foreign accounts, there is a way to resolve the matter with the IRS without the possibility of going to prison. The Offshore Voluntary Disclosure Program (OVDP) is an initiative established by the IRS to help taxpayers with secret foreign bank accounts come forward, pay a penalty, any back taxes and interest, and provide full disclosure about their account abroad in exchange for an agreement to not be prosecuted by the federal government for an FBAR violation. Although the OVDP is not a fit for every taxpayer with an undisclosed foreign account, it is a popular and efficient way to sleep better at night knowing that a federal judge won’t be sentencing you to spend years behind bars.
The OVDP has two downsides. First, because it is a program of the IRS and not set up by Congress, it can come to an end at any time. Second, taxpayers could be disqualified from the program if the IRS has already started an investigation or tax examination with the taxpayer as the target. The examination does not have to be FBAR related in order to potentially qualify the taxpayer. Thus, time is of the essence. Speaking to an experienced tax attorney as soon as possible is highly recommended when the stakes are so high.
The tax and accounting professionals at the Tax Law Offices of David W. Klasing have extensive experience in representing taxpayers from all walks of life. From tax examinations, to business tax audits, to full blown criminal investigations, our team of zealous advocates are ready and willing to take ownership of your particular situation and take some of the burden off of your shoulders. When Uncle Sam comes knocking with his team of highly-trained lawyers and investigators, ensure that you don’t answer the door alone. Contact the Tax Law Offices of David W. Klasing today for a reduced-rate consultation and be sure to visit our YouTube Channel for helpful videos about this and many other hot tax topics.