2014 marked a significant increase in the enforcement efforts by the IRS and Department of Justice against non-compliant U.S. taxpayers who failed to report their off-shore bank accounts and earnings. Grand Jury proceedings have been in full force and various criminal proceedings have been instituted. IRS investigations continue to increase and serious penalties are being proposed or assessed against taxpayers who failed to timely report their offshore accounts and earnings. In one case, proposed penalties amounted to almost $5 million for a taxpayer who had some $10-11 million in offshore accounts despite the fact that the taxpayer’s motive, acknowledged by the IRS, was to place assets beyond the reach of his spouse rather than tax avoidance. These proposed penalties consisted of civil fraud (75% of the non-reported taxes plus interest) and significant penalties for failure to timely file various information forms. This is despite the fact that the offshore accounts had previously been taxed in the United States and their earnings in the offshore accounts were, in most cases, nominal.
These penalties could have been substantially reduced had the taxpayer participated in the IRS’ ongoing Offshore Voluntary Disclosure Program (OVDP). A maximum 27.5% offshore penalty, together with an accuracy penalty, are assessed in lieu of what might be extraordinary penalties for failing to timely file the “Report of Foreign Bank and Financial Accounts” (FBAR) – - the IRS having discretion to assert a penalty up to 50% of the balances in each of the taxpayer’s offshore accounts to assert an annual penalty. Participation in the OVDP also eliminates the risk of a criminal prosecution which should not be lightly discounted or ignored.
Despite the clear advantages of a voluntary disclosure, it is well-know that thousands of taxpayers continue to be non-compliant in their reporting of offshore accounts, apparently believing that they face greater risks by making the disclosures. This comes despite the obvious advantages of participating in the OVDP and the significant reduction in risk of both in terms of civil penalties and a criminal prosecution on felony charges. The present reality is that, given some additional time, the IRS and the Department of Justice will be able to identify greater numbers of non-compliant taxpayers, in part based on increasing disclosures made by offshore banks under various arrangements with the Department of Justice.
Other taxpayers are attempting to minimize their exposure by taking what many consider to be a very risky approach of using “quiet disclosures”. This involves amending previously filed tax returns to disclose offshore accounts and earnings. This practice is followed by many, despite clear warnings by the IRS that “quiet disclosures” will not provide any assurance that the reduced penalties under the OVDP will be available or that the risk of criminal prosecution will be reduced. These “quiet disclosures” can, in fact, play into the hands of the IRS since they constitute admissions by the taxpayers of the non-reported offshore earnings as well as the income taxes which were not reported or paid in previously filed tax returns.
This is a time when taxpayers, who have not to date reported their offshore accounts, to get competent legal advice as to how to best proceed. Waiting for the IRS to find the non-reported account is not an advisable option.