Even though you may have closed your foreign accounts years ago, the IRS can go back as far as six years to impose penalties and perhaps even criminal prosecution for taxpayers who did not disclose their worldwide income on their U.S. income tax returns nor report their foreign accounts to the U.S. Treasury.
IRS has established programs for taxpayers to voluntarily come forward and disclose unreported foreign income and foreign accounts under what the IRS calls the Offshore Voluntary Disclosure Initiative (OVDI).
On January 9, 2012 the IRS announced the terms of the 2012 OVDI which requires that taxpayers: (1) File 8 years of back tax returns reflecting unreported foreign source income; (2) Calculate interest each year on unpaid tax; (3) Apply a 20% accuracy-related penalty under Code Sec. 6662 or a 25% delinquency penalty under Code Sec. 6651; and (4) Apply up to a 27.5% penalty based upon the highest balance of the account in the past eight years.
In return for entering the offshore voluntary disclosure program, the IRS has agreed not to pursue charges of criminal tax evasion which would have resulted in jail time or a felony on your record; and other fraud and filing penalties including IRC Sec. 6663 fraud penalties (75% of the unpaid tax) and failure to file a TD F 90-22.1, Report of Foreign Bank and Financial Accounts Report, (FBAR) (the greater of $100,000 or 50% of the foreign account balance).
Recent or past closure and liquidation of foreign accounts will not remove your exposure for non-disclosure as the IRS will be securing bank information for the last eight years. Additionally, as a result of the account closure and distribution of funds being reported in normal banking channels, this will elevate your chances of being selected for investigation by the IRS.
For those taxpayers who have submitted delinquent FBAR’s and amended tax returns without applying for amnesty (referred to as a “quiet disclosure”), the IRS has blocked the processing of these returns and flagged these taxpayers for further investigation. You should also expect that the IRS will use such conduct to show willfulness by the taxpayer to justify the maximum punishment.
Taxpayers who hire an experienced tax attorney in Offshore Account Voluntary Disclosures should result in avoiding any pitfalls of non-disclosure or incomplete disclosure.