If you have spent any time on this blog or reading about tax and international tax issues, you probably already understand that it is not an accepted or acceptable practice to keep secret offshore accounts. For a number of years many taxpayers may have gotten away with it, however one’s continued luck can no longer be counted on due to the significant efforts undertaken and resources committed by the United States government in seeking and stamping out offshore tax evasion.
The U.S. government has, essentially, constructed a global banking and tax information clearinghouse from which the IRS and Department of Justice are privy to an array of foreign financial data. First, amendments to the Bank Secrecy Act created new penalty for even inadvertent Report of Foreign Bank Account (FBAR) reporting errors while strengthening the penalty for willful violations. This new penalty placed a new emphasis on reporting foreign accounts and providing offshore account information to the government. The passage of FATCA further increased the importance of making disclosures of foreign accounts due to its corresponding tax information sharing agreements. Through these agreements the U.S. government can review a vast amount of tax and financial data from more than 100 nations to identify noncompliant U.S. taxpayers.
Banks Continue to Agree to IRS’ Swiss bank Program Placing Previous Confidential Account Data in Jeopardy
This week, the IRS announced that two additional banks had come to terms with the United States government through its Swiss Bank program. The banks that agreed to the terms of the program are required to meet certain standards and agree to provide the U.S. government with certain account information and take other actions to achieve and safeguard compliance. These acts include:
- A comprehensive disclosure of all cross-border banking and investment activities.
- Provide specific information on an account-by-account basis.
- Participate in all information requests under an operative information sharing agreement tax treaty.
- Payment of applicable penalties.
- Close accounts of individuals that refuse to come into compliance.
Swiss bank Bank La Roche & Co AG agreed to these terms and others. Taxpayers who have had offshore dealing with the company or who have transferred funds out of the bank without making an offshore disclosure can face serious penalties and are now significantly more likely to be identified and prosecuted.
What is the Standard Penalty Under FBAR and FATCA?
Penalties under FBAR and FATCA are harsh. Even an inadvertent filing mistake can cost a taxpayer a $10,000 penalty under FBAR for each year where the account went undisclosed. If a taxpayer’s failure to file FBAR is believed to have been because of an intentional or voluntary act or omission, the penalties for a willful failure to file FBAR are even harsher. Willful failure to file FBAR can result in a penalty that is the greater of $100,000 or 50 percent of the account’s balance. Since penalties can be applied for multiple tax years, it is not uncommon for a willful tax violation to exceed the account’s original balance.
Penalties under FATCA can also be harsh. Failure to file under FATCA can result in a penalty of $10,000. A taxpayer that continues to fail to comply with FATCA disclosure requirements can be assessed an additional $50,000 fine. Furthermore, if the taxpayer has underpaid tax due to non-disclosure of offshore assets, a substantial understatement penalty of 40 percent applies.
How Can OVDP or Streamlined Disclosure Mitigate the Tax Consequences I Face?
Participating in the OVDP or Streamlined Disclosure programs offered by the IRS can permit a taxpayer to come back into compliance while facing significantly reduced fines and penalties. Individuals who represent a low compliance risk may be able to use the Streamlined disclosure program and certify their non-willfulness to have many of the fines and penalties they would otherwise face waived. For people who cannot qualify for Streamlined disclosure, Offshore Voluntary Disclosure Program (OVDP) can provide a pathway to compliance with reduced penalties. Typically individuals must pay a 27.5 percent penalty to participate in OVDP. However, if your bank is added to the IRS’ list of Foreign Financial Institutions or Facilitators, you will face a 50 percent offshore penalty.
In short, there is still a window for non-complaint taxpayers to come back into compliance while paying mitigated fines and penalties. However, that window is quickly closing. In light of FATCA and FBAR disclosure and an increasing number of foreign banks taking the DOJ’s Swiss bank deal, the odds of detection and identification have never been greater. If you suspect or fear potential offshore account disclosure issues, the time to act is today.
To schedule a reduced-rate offshore tax consultation, contact the experienced and dedicated tax lawyers and CPAs of the Tax Law Offices of David W. Klasing by calling 800-681-1295 or contact us online today.
