If you have unreported offshore bank or brokerage accounts, the 2014 Offshore Compliance Program might be your salvation. This, the third installment of the Offshore Voluntary Disclosure Program, is for those with unreported offshore accounts and a good story as to why they did not report. I will give a few examples of such excuses, but, if you are on the fence, I urge you to take advantage of the 2014 Offshore Compliance Program.
Just so we are clear, the 2014 IRS Offshore Compliance Program is about bringing in more cash. The government believes it has got as much as it’s going to get from the first two versions, so now they are making a deal you can’t refuse.
The current Offshore Compliance Program is aimed at those who felt the previous iterations were too harsh and were holding out for a more “just” option. Well, here it is:
If you can prove to the satisfaction of the IRS that you did not intend to violate the law by failing to report an offshore bank account, and you come forward before they track you down, you will pay a 5% penalty on the highest balance of your offshore account if you are living in the U.S. and no penalty if you are living abroad. You must also file or amend and pay your last 3 years of U.S. tax returns.
For those of you who believed you were in the right, and that the IRS was way too hostile in the past, this is a big improvement. Previously, you were looking at a 27.5% penalty on the highest balance.
The other big change is that these reduced penalties apply no matter how much tax you owe to the IRS when you amend or file your tax returns. The previous program eliminated all penalties if you owed $1,500 or less. This time around, it doesn’t matter how much you owe, so long as you have a good story.
However, you should take note that the IRS has the last word as to whether you qualify. There is no getting in to tax court or going before an impartial judge. If the Service rules against you, you are going to pay a 27.5% penalty.
And this 27.5% penalty can go higher. If the IRS is investigating your offshore bank at the time you file for the 2014 IRS Offshore Compliance Program, then you will be hit with a 50% penalty. So, if you are at risk of being caught, and the IRS is already on your trail (all be it indirectly), your penalty goes from 27.5% to 50%.
As I said above, the 2014 IRS Offshore Compliance Program is all about cash. The government figures that, if you did not come forward before, and have not been caught up in the nets they have thrown and used to indict 100+ Americans, then you are probably beyond their reach. The new program is aimed at those with a low chance of criminal prosecution and a good reason to have an unreported offshore account.
The previous version of the OVDI brought in $6.5 billion from 45,000 taxpayers. In addition, they have collected $780 million from UBS and $2.6 billion from Credit Suisse in May of 2014. And it looks like there is another pot of gold out there for them to go after and not just the scraps.
So, what is an example of good cause in the 2014 IRS Offshore Compliance Program? The best case is someone who has been living and working abroad for the last several years. If you are in a low tax country, the previous program was just too expensive. This one just might bring you forward and convince you to disclose your assets to the U.S. IRS.
Another example is someone who moved to the U.S. recently and has been reporting all of his U.S. income and assets, but not his foreign accounts, which he had prior to becoming a resident. I expect this case to qualify for the 5% penalty if his offshore bank is not on the IRS’s radar.
Another possible example of the 5% penalty is the U.S. person who is a signor on his family’s non-U.S. accounts. Let’s say your parents live in Mexico and you in California. You are a signor on their bank accounts in Mexico for estate planning and emergency purposes. You were unaware that you needed to report these accounts and now want to come clean. Most importantly, you never deposited money in these accounts.
Please note that these examples are based on my experience and expectations. No filings have been completed under the 2014 IRS Offshore Compliance Program so these are just educated guesses on my part. We all wait to see how fair and balanced the IRS will be in their application of these rules. Of course, once you come forward and give the collector a map to your assets and income, there is no going back. You must accept whatever ruling comes down.
As you know, this website is dedicated to IRS tax debt relief. The Offshore Voluntary Disclosure Program can be a complicated matter. I suggest you review the IRS Offshore Voluntary Disclosure Program for more information on international tax matters. If you need a firm to prepare your tax returns and determine your risks and costs coming forward, they are well qualified to assist you.