Over the past few years, the IRS has announced various programs designed to encourage taxpayers to voluntarily disclose their offshore financial accounts before being discovered by the IRS. In late January, the IRS announced that it is extending the current version of the Offshore Voluntary Disclosure Program (“Program”) indefinitely. Taxpayers who voluntarily enter the Program will generally be protected against criminal prosecution for failing to disclose their foreign accounts and will be subject to a reduced penalty structure.
Risks of Not Disclosing Foreign Accounts
Taxpayers who have failed to report foreign accounts and who have not yet entered into the Program are subject to a range of penalties depending upon the circumstances. These penalties can be a flat amount of $10,000 or $100,000 per year, and can rise to a maximum of 50% of the account balance per year, depending upon the taxpayer’s particular circumstances. (These penalties are in addition to the tax, interest, and penalties that apply to unreported income.) Since these penalties are imposed on a per year basis, a taxpayer who has failed to disclose his or her foreign accounts over multiple years could face penalties that exceed the balance in those accounts.
Benefits Available Under the Program
Taxpayers who take advantage of the Program will pay a one-time penalty equal to 27.5% of the highest aggregate offshore account balance for the most recent tax years (50% if the foreign account is maintained at a foreign financial institution that has been identified by the IRS). Taxpayers who enter the Program and do not want to accept the 27.5% penalty may later “opt out” of the Program and may try to negotiate a more favorable settlement, but those taxpayers who “opt out” lose the benefits of the Program and are not allowed to re-enter.
In addition to the penalty for failing to disclose the foreign accounts, taxpayers who enter the Program will also be required to pay the regular income tax, interest, and penalties that should have been paid on any unreported foreign income for a lookback period of up to 8 years.
Evaluating Whether Participation in the Program Is Appropriate
There are alternatives to electing to participate in the Program. For example, taxpayers that can certify that they did not “willfully” fail to disclose their offshore accounts, can disclose their offshore accounts (outside of the Program) and only be subject to a 5% penalty on the highest aggregate account balance for the most recent three tax years. However, if this disclosure is not accepted by the IRS, the taxpayer is no longer eligible to enter the Program.
The decision of whether to enter into the Program to become compliant or whether compliance can be reached outside of the Program is a decision that should be made only after a careful consideration of the taxpayer’s particular circumstances. Taxpayers are urged to begin this process as soon as possible, before the IRS discovers the taxpayer’s foreign accounts on its own.