Back
Back
Back
Back
Back
Back
Back
Back
Back
Back
Back
Back
Back
Back
Back
Back
Back
Back

IRS Cracks Down on Undisclosed Foreign Accounts

Written by: Peter D. Anderson & Richard M. Stone

Published in the New Hampshire Bar News

The message from the IRS to owners of undisclosed foreign financial accounts is clear: Enter the IRS Offshore Voluntary Disclosure Initiative (OVDI) or risk criminal prosecution and/or enormous civil penalties.

United States taxpayers are required to pay taxes on their worldwide income and to disclose the existence of foreign financial accounts on their tax returns. If the account or accounts have a value in excess of $10,000, taxpayers are also required to file a Report of Foreign Bank and Financial Accounts (FBAR) by June 30 of each tax year.

Criminal penalties associated with failure to report a foreign financial account are a maximum fine of $250,000 and up to five years in prison. The penalty for a non-willful civil violation is a fine of up to $10,000. However, if the violation is deemed willful, then the penalty is the greater of $100,000 or 50 percent of the account balance at the time of the violation. The foregoing penalties are applicable to each violation of the FBAR reporting rules.

Many clients are indecisive and apprehensive about making a voluntary disclosure, in light of the hefty penalties imposed by the OVDI. Some clients are willing to “take their chances” and avoid entering the OVDI. It is important to make these clients aware of IRS enforcement initiatives.

Since 2007 and beginning with the United Bank of Switzerland, the government has launched investigations of foreign banks that have resulted in disclosures of account-holder information to the IRS. The government has also been actively pursuing treaty requests with countries with which the United States has tax treaties. Finally, the government has at its disposal the recently enacted Foreign Account Tax Compliance Act (FATCA).

While the intricacies of FATCA are beyond the scope of this article, the act represents a major enforcement tool for the government. FATCA was signed into law in 2010, and already the United States has understandings or agreements with Ireland, Denmark, France, Spain, Germany, Italy, the United Kingdom and Switzerland, to implement information exchange regarding foreign accounts. And the government is aggressively pursuing agreements with other countries.

These government enforcement initiatives make it much more likely that the IRS will become aware of undeclared foreign accounts of US taxpayers. Once the IRS is aware of undeclared foreign account information, the OVDI is no longer an option available to a client, and much more severe penalties, civil and/or criminal, will likely be imposed.

According to the IRS, “Taxpayers with undisclosed foreign accounts or entities should make a voluntary disclosure because it enables them to become compliant, avoid substantial civil penalties and generally eliminate the risk of criminal prosecution.”

A voluntary disclosure also makes it possible to calculate, with a reasonable degree of certainty, the total cost of resolving offshore tax issues, the IRS has said.
 
“Taxpayers who do not submit a voluntary disclosure run the risk of detection by the IRS and the imposition of substantial penalties, including the fraud penalty and foreign information return penalties, and an increased risk of criminal prosecution,” the agency warns. “The IRS remains actively engaged in ferreting out the identities of those with undisclosed foreign accounts. Moreover, increasingly this information is available to the IRS under tax treaties, through submissions by whistleblowers, and will become more available as the Foreign Account Tax Compliance Act (FATCA) and Foreign Financial Asset Reporting (new IRC §6038D) become effective.”

The “increased risk” that the IRS refers to is dramatic, as thousands of names have already been disclosed to the IRS by foreign banks and cooperating tax authorities. The IRS is using these lists for both criminal prosecutions and civil audits and is aggressively pursuing information exchange agreements with other countries.

For calendar-year taxpayers, the voluntary disclosure period is the most recent eight tax years for which the due date has already passed. The OVDI disclosure is made by filing both the original returns and amended returns for the prior eight years to report all income and disclose the foreign accounts, filing all missing FBAR reports, cooperating fully in the OVDI process, signing agreements to extend the statutes of limitations, paying a penalty of 27.5 percent (reduced in only very limited cases) of the accounts’ highest balance over the eight-year period, paying a 20 percent accuracy penalty based on the total underpayment for the eight years, paying failure-to-pay penalties, and paying failure-to-file penalties, if appropriate.

The OVDI program is evolving and has many critics. However, the IRS has had tremendous success in raising revenue – as of June 2012, it collected more than $5 billion in back taxes, interest and penalties from 33,000 voluntary disclosures made under the first two programs in 2009 and 2011.

Peter Anderson ([email protected]) is a former trial attorney for the US Department of Justice, Tax Division. He currently is a director at the McLane law firm and focuses his practice on white collar criminal defense and tax litigation.

Rick Stone’s ([email protected]) practice at the McLane law firm focuses on planning, audits, appeals, and litigation of state, federal and international tax matters. He is chair of the Tax Section of the Massachusetts Bar Association and is a frequent speaker and author of tax-related topics of interest to accountants, attorneys and their clients. 

Integrity and trust

At McLane Middleton we establish and maintain long-standing relationships with our clients to help us better achieve their unique goals over time. This approach to building trust requires that our esteemed lawyers and professionals use their broad, in-depth knowledge and work together with integrity to ascertain sound resolutions to legal matters for their clients.

Strength in numbers

McLane Middleton is made up of more than 105 attorneys who represent a broad range of clients throughout the region, delivering customized solutions. As a firm we are recognized as having the highest legal ability rating. The firm is rated Preeminent by Martindale Hubbell and is recognized as one of the nation's leading law firms in Chambers USA. Our attorneys are distinguished leaders in their respective practice areas.

Meet Our People

Commitment and collaboration

McLane Middleton's versatile group of attorneys and paralegals become trusted authorities on each case through collaboration. We work with our clients to learn their individual needs first and foremost and, together, we develop comprehensive solutions to their specific legal matters. This approach helps us exceed our clients' expectations efficiently and effectively, client by client, case by case.

Practice Areas

A history of excellence

McLane Middleton was established in 1919 in New Hampshire, and has five offices across two states. However, deep historical roots don't allow you to become innate. Our firm is organized, technological, and knowledgeable. Our history means we are recognized. But our reputation is built on the highest quality of service and experience in very specific areas of law.

The Firm

Intelligence paired with action

Our team continuously seeks opportunities to enhance their professional development and put key learnings to action. The pursuit of further insight guides us to volunteer service opportunities, speaking engagements, and teaching roles. Our lawyers are sought after thought leaders across their industries, and recipients of leadership awards throughout the region.