We handle a lot of inquiries from taxpayers trying to figure out if they really need to enter into the 2012 IRS Offshore Voluntary Disclosure Program. Tax preparers have also questioned us on what to do now that they have learned that a client has never reported their foreign income and foreign accounts. Some tax advisors are recommending that taxpayers merely get into compliance on a go forward basis and do nothing to address the past non-compliance gambling that the IRS does not have the resources to detect the foreign account. I call this “Present Tax Year Only Disclosure”. This could be the worst advice ever. In my opinion this option is also not viable because of the ease with which the U.S. government can flag Foreign Bank Account Reports (TDF 90-22.1) commonly known as “FBAR′s” and I have heard rumors that the Criminal Investigation Division (CID) has created a group of special agents to monitor for just this occurrence.
How would Present Tax Year Only Disclosure actually work in the real world?
So let’s think about this first FBAR that a taxpayer is going to file to get into present and future compliance. This FBAR will list the following information – the bank, the account number and the value of the account.
Seems harmless enough. But the truth is that this information tells the IRS a lot more than that. For instance, let’s suppose that the IRS knew, through intense data collection, that any Credit Suisse bank account that starts with “240″ and was opened between 1997 and 1999. Now it just so happens that this taxpayer’s 2013 FBAR includes a Credit Suisse bank starting with 240 with a balance of $750,000.
So what is this 2013 FBAR really saying? “Hey IRS, here is a foreign bank account that I opened around 1997-1999. I never had an FBAR filing obligation before because the account must have been under $10,000. But now, out of the blue, this account has blossomed from next nothing to $750,000 overnight.”
So then what would the IRS do with that information?
Well if I were a CID special agent my thought process would be as follows:
The taxpayer has just reported a $750,000 account balance at Credit Suisse. Let’s take a look at his prior returns. Hmmmm… for the last 3 years he has made $50,000 a year or so… Thus… the deposit could not have come from previously taxed U.S. income. Did the taxpayer inherit this money? If he did he better have filed a form 3520 to report the inheritance or I get to hit him with a 35% penalty on the amount of the inheritance! Hmmmm…. No 3520 was filed. Gee… Since I can determine that the funds did not come from previously taxed earnings or from an inheritance there must be something fishy afoot here… Let’s audit this taxpayer. Matter of fact; let’s have the criminal investigation division take a look as well…
As you can see, this is not a viable option.
The IRS Civil Division has the ability to assess FBAR penalties, and the penalty is 50% of that account’s value for the year. Armed with a John Doe summons, the IRS could assess FBAR penalties for each of the years.
Additionally, because the taxpayer failed to include the interest earnings on his Credit Suisse account and most likely checked the box “no” on schedule B which asks about the existence of foreign accounts, the taxpayer has also filed false and fraudulent income tax returns for which he has exposure to the 75% civil fraud penalty. Unlike the normal six year statute of limitations for tax evasion, there is no statute of limitations for the civil fraud penalty.
So when doing the math from the fallout of a Present Tax Year Only Disclosure, the amount due could exceed the value of the accounts meaning the taxpayer could wind up with nothing, the accounts totally wiped out, or even a tax bill placing all of the taxpayer’s wealth at risk, not just his offshore accounts. And the taxpayer could still face criminal charges.
If you have never reported your foreign investments on your U.S. Tax Returns, you should seriously consider participating in the IRS’s Offshore Voluntary Disclosure Initiative (OVDI) which allows taxpayers to come forward to avoid criminal prosecution and not have to bear the full amount of penalties normally imposed by IRS. Taxpayers who hire an experienced tax attorney in Offshore Account Voluntary Disclosures should result in avoiding any pitfalls and gaining the maximum benefits conferred by this program.
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