Internal Revenue Service Voluntary Disclosure of Offshore Accounts: Recent Developments
Many taxpayers have participated in the voluntary disclosure programs for offshore accounts that the Internal Revenue Service (“IRS”) made available in 2009 and 2011 and then extended indefinitely starting in 2012. With each version of the program the IRS increased the highest “offshore penalty” from 20% (2009 Program) to 25% (2011 Program) and eventually to 27.5% (current Program) of the largest offshore account balance (with all accounts combined) over the eight year disclosure period.
We talk regularly with clients about their particular situation, such as offshore accounts that were recently discovered as they handled the estate of a deceased family member or the financial matters for an elderly parent, and it is critical for clients to understand their income tax and foreign account reporting obligations, both for purposes of FBAR or FATCA reporting.
In our view, non-reporting is not an option. We have heard of taxpayers who believe that their accounts will not be “discovered” because of bank secrecy laws, use of numbered accounts, use of offshore entities and the like. For U.S. citizens and residents, income from all sources is subject to tax unless there is a specific exclusion or exemption, so income from an offshore account is taxable the same way that income from your savings account or brokerage account is taxable. The fact the funds are held offshore does not change this analysis.
The IRS and the Department of Justice have increased enforcement and information gathering about offshore accounts. For example, as a result of an agreement reached last year with several Swiss banks, many taxpayers are now receiving letters from Swiss banks specifically asking if the account holder has reported the income held by the Swiss bank or participated in the IRS voluntary disclosure program. The Department of Justice continues to use “John Doe” summonses to obtain tax information about offshore accounts and it has recently obtained decisions (favorable to the U.S. Government) that the “required records doctrine” exception to the Fifth Amendment privilege against self-incrimination applies to allow into evidence tax documents obtained by summons against a taxpayer suspected of maintaining an offshore bank account.
In addition, the Department of Justice has prevailed in cases involving FBAR willfulness penalties where, among other factors, a taxpayer answered “no” to the questions on Schedule B to Form 1040 regarding the existence of a reportable offshore account when the taxpayer did in fact have such an account.
We regularly advise clients on issues involving offshore accounts and any delay in reporting these accounts is not advisable. Taking the approach that these accounts will not be “found” by the IRS or Department of Justice is not recommended and dealing with taxing authorities after they have discovered the accounts typically results in a far worse tax outcome than taxpayers who are proactive and report the accounts.
If you find you have a reporting obligation, we suggest that you be proactive and discuss your reporting options with your tax advisor.
If you would like to discuss how any of these reporting obligations may affect your business or personal income tax situation, or have any other tax or estate planning questions, please contact, Bill Hussey (215-864-6257), John Eagan (212-868-4835), Kevin Koscil (215-864-6827) or Suzanne Prybella (215-864-7188). The Tax and Estates Practice Group at White and Williams is committed to keeping our clients and friends up to date with important tax developments.
IRS Circular 230 Notice: To ensure compliance with certain regulations promulgated by the U.S. Internal Revenue Service, we inform you that any federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, by any taxpayer for the purpose of (1) avoiding tax-related penalties under the U.S. Internal Revenue Code, or (2) promoting, marketing or recommending to another party any tax-related matters addressed herein, unless expressly stated otherwise.