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Reporting Offshore Financial Accounts: The Costs of Non-Compliance

Contributor: Victoria Tarakanova, Tax & Business Services staff


As a general rule, the United States taxes its citizens and residents on their worldwide income and imposes annual information reporting on certain foreign assets. Failure to comply with these requisite tax information filings can potentially result in severe financial penalties, prosecution and, in some cases, jail time. With the implementation of the Foreign Account and Tax Compliance Act ("FATCA"), offshore account compliance for U.S. citizens and residents has become even more important.

FATCA: How the Internal Revenue Service Can Discover a U.S. Taxpayer's Offshore Account

There are many ways the Internal Revenue Service ("IRS") finds out about a taxpayer's foreign accounts; for example, IRS investigations of banks, including Credit Suisse, Julius Baer, HSBC, Basler Kantonal Bank, as well as the Swiss Bank program, where Swiss banks seeking non-prosecution agreements were required to disclose taxpayers' account information. Adding to the pressure are the new and increasing number of information-sharing agreements between the United States and foreign governments as a result of FATCA. Furthermore, foreign financial institutions are continuing to reveal non-compliant U.S. taxpayers who hold undisclosed assets abroad.

FATCA took effect in July 2014. The new law triggered reporting by thousands of foreign financial institutions to the IRS data on American clients with accounts containing at least $50,000, or otherwise withholding 30 percent of the dividends, interest and other payments on U.S.-sourced income due to those American clients. Countries with secrecy laws protecting client confidentiality, including Switzerland, are no longer exempt. Non-compliant foreign financial institutions can be frozen out of U.S. markets, so they are complying.

Even though FATCA officially went "live" in 2014, APEX Funds Services reminds us that many of the key implementation deadlines took place in 2015 and will continue to unfold over the next few years. So far, more than 80 nations have agreed to the law. Over 77,000 foreign financial institutions have signed on as well.

"The money is moving out of Switzerland to a variety of jurisdictions," said Caroline Ciraolo, the Justice Department's top tax prosecutor. According to lawyers and prosecutors, financial institutions in Singapore and Israel are possible targets.

The Benefits of Voluntary Disclosure

U.S. taxpayers still have access to safe harbors such as the Offshore Voluntary Disclosure Initiative ("OVDP program"), which can mitigate or minimize the penalties associated with non-compliance. However, the IRS has reserved the right to terminate OVDP or increase its penalty structure at any time. Alternatively, the IRS can choose to limit the types of taxpayers who may enter into the OVDP program. Once the program closes, taxpayers may again face full audits and investigations, potential prosecution, and full penalty known in technical jargon as the "FBAR penalty," for failure to file the Foreign Bank and Financial Accounts disclosure form.

Since 2009, the risk involved with failing to disclose offshore assets has been steadily increasing. The U.S. Department of Justice is increasing its civil and criminal prosecution for tax fraud and evasion, and the IRS is increasing its civil and criminal audit enforcement.

The current OVDP program was launched in 2012 and is the successor to prior voluntary programs offered in 2011 and 2009. Since the launch of the first program, approximately 85,000 taxpayers have come into compliance voluntarily, paying about $8 billion in taxes, interest and FBAR penalties.

Taxpayers entering the program generally receive two valuable considerations in return: escaping potential criminal prosecution for tax evasion, if applicable, and a significant break on the maximum FBAR penalty. Taxpayers seeking to enter into the OVDP program, but who are discovered by the IRS before they are accepted into the program, can otherwise potentially face a maximum 50 percent penalty.

In 2014, the IRS expanded the streamlined procedures to the OVDP program to accommodate a wider group of U.S. taxpayers. With the 2014 changes, procedures became available to a wider population of U.S. taxpayers living outside the country and, for the first time, to certain U.S. taxpayers residing in the United States.

For eligible U.S. taxpayers residing outside the United States, all penalties will be waived. According to the IRS, the estimated 6 million expatriate Americans who live and work abroad can perhaps benefit from the changes. Furthermore, for eligible U.S. taxpayers residing in the United States, the only penalty will be a miscellaneous offshore penalty equal to 5 percent of the foreign financial assets that gave rise to the tax compliance issue. Previously, the penalty was as high as 27.5 percent, computed as a percentage of the minimum balance in the undisclosed foreign account.

As previously indicated, the OVDP program can be discontinued at any time, as there is no scheduled "sunset" date. Despite the significant amount of revenue being generated by the program, the IRS has started to remind taxpayers that the program is not permanent.

Thanks to Victoria Tarakanova, Tax & Business Services staff, for her contributions.



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