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Disclosing Off-Shore Accounts Through OVDP May Not Yield the Amnesty Taxpayers Have Come to Expect

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Disclosing Off-Shore Accounts Through OVDP May Not Yield the Amnesty Taxpayers Have Come to Expect

Date: 03/14/13

Topic: Foreign Accounts

Several U.S. taxpayers with accounts at Israeli banks who have already begun the process of voluntary disclosure through the OVDP are now being deprived of its amnesty benefits. In an unusual move, the IRS has told dozens of customers of Israel’s Bank Leumi and Mizrahi Tefahot Bank they have been disqualified from participating in the program.

The program, revived in January 2012, has helped the IRS collect billions of dollars in tax revenues. Two previous voluntary disclosure programs, in 2009 and 2011, brought in more than $4.4 billion in taxes from tens of thousands of taxpayers with foreign accounts. The program allows U.S. clients of foreign banks to step forward, tell the IRS about hidden offshore holdings and pay their back taxes, in exchange for possible government leniency.

Failing to disclose a foreign account on a 1040 is a criminal offense. Those with offshore accounts are also required to file a Report of Foreign Bank and Financial Accounts or “FBAR” annually with the Treasury, and can be fined up to half the value in a foreign account for each year they fail to file.

If the IRS already has a taxpayer under audit or investigation, that taxpayer is not eligible for the OVDP. Therefore, in order to figure out if a client qualifies for the program, tax lawyers first provide the name and Social Security number of the client to the IRS and are given approval (or disapproval) for the program. Taxpayers given a green light then must send in a completed and signed questionnaire about their accounts and ultimately file eight years of amended back returns and pay all corresponding back taxes. In the case of these Israeli bank account holders, the IRS had approved them for the OVDP, but is now revoking that approval, in some cases after back taxes have already been paid.

An IRS spokesman said in a statement: “There are a number of reasons why a taxpayer may be disqualified from participating in the IRS’ offshore disclosure program. For example, a taxpayer may be disqualified if he/she fails to make a timely, truthful and complete disclosure.” The spokesman said the IRS cannot comment on specific cases. The IRS sent two-sentence form letters to those being disqualified that say “upon further review it has been determined that your client is declined” from the program.

Bank Leumi sent a letter to its U.S. account holders last December telling them about the OVDP and suggesting they consult with an attorney about participating in it. But now, with the IRS’s change of heart, those with hidden accounts may be less willing to come forward.

A U.S. crackdown on Americans using offshore banks to avoid taxes began with Swiss banks, but has widened to Israel.

Consulting a tax attorney is the best way to minimize possible civil and criminal penalties due to failed or untimely disclosures. A tax attorney knows how to navigate the nuanced tax laws relating to offshore account disclosure requirements and will know how to respond and provide you with the best defense in unexpected circumstances.