Is there Anywhere Left to Hide Offshore Accounts from the IRS?

6 Methods IRS Uses to Find Hidden Offshore Accounts 

In years past, it was much easier for U.S. taxpayers to keep money hidden overseas without the IRS finding it. Unfortunately, with the introduction of FATCA (Foreign Account Tax Compliance Act), AI modules, and various other enforcement protocols, the IRS is much more capable of uncovering your hidden or secret foreign accounts, assets, and investments. As a result, the IRS has increased penalty assessment and enforcement in accordance with foreign accounts compliance. For taxpayers who get caught with unreported foreign accounts and assets, they may find themselves on the receiving end of a substantial fine or penalty — although the IRS also offers various FBAR/FATCA amnesty programs to assist taxpayers with safely getting into compliance. Let’s take a brief look at six methods the IRS uses to find offshore money. Originally published by Goldig & Golding on 9/2018.

Third Party Offshore Disclosure

One of the easiest ways for the IRS to find your information is when it is provided by another person to the IRS when the other person submits their own offshore disclosure. For example, maybe a former business partner is submitting to the streamlined procedures and going back and filing six years of FBARs. You may have been a partner with this individual during that time and had signature authority or ownership over various foreign accounts, which will now be presented to the IRS through the third party’s offshore disclosure.

Foreign Asset Whistleblowers

A whistleblower is an individual who proactively contacts the IRS, DOJ, or other government agency to basically tattle about other people to either save their own hide or to receive a financial benefit (while some individuals whistleblow for truly altruistic purposes, in our practice we have found this is rarely the case) The hardest part about the whistleblower scenario is that the whistleblower will not tell you that they have gone in there so the IRS will begin investigating before you even hop an opportunity to protect yourself.

Joint Account Filings

This is a typical situation in which a taxpayer has joint accounts with another person, and that other person is either filing a timely FBAR or possibly submitting to a disclosure program. When there is a joint account, the filer has to include some information about the joint filer, and ultimately, this may lead to the IRS having your offshore account information.

FATCA Reporting

FATCA is the Foreign Account Tax Compliance Act. More than 110 countries and hundreds of thousands of foreign financial institutions have entered into agreements with the U.S. government to provide U.S. account holder information. Oftentimes, the foreign financial institution will provide information about the foreign accounts and income associated with those accounts so if you have not provided this information to the IRS you may want to consider one of the amnesty programs before you are penalized and eligible for an amnesty program.

Other Foreign Bank/U.S. Agreements

Sometimes, a foreign financial institution or several foreign financial institutions will enter into a deferred prosecution agreement with the U.S. government. This was the case several years ago with several Swiss banks, such as UBS. As part of the agreement, the U.S. government requires these banks to turn over information about their U.S. account holders to the IRS, and the IRS and DOJ can pursue civil and criminal investigations.

AI

Recently, the Internal Revenue Service has been integrating AI, which they can use to cross-reference information regarding FATCA, FBAR, and other filing protocols to determine whether the taxpayer has foreign accounts, whether they have been reporting their foreign accounts timely, and or whether they stopped reporting foreign accounts or otherwise are out of compliance.

Late Filing Penalties May be Reduced or Avoided

For Taxpayers who did not timely file their FBAR and/or other international information-related reporting forms, the IRS has developed many different offshore amnesty programs to assist Taxpayers with safely getting into compliance. These programs may reduce or even eliminate international reporting penalties.

Late-Filing Disclosure Options

If a Taxpayer is out of compliance, there are various international offshore tax amnesty programs that they can apply to safely get into compliance. Depending on the specific facts and circumstances of the Taxpayers’ noncompliance, they can determine which program will work best for them.

*Below please find separate links to each program with extensive details about the reporting requirements and examples.

Streamlined Filing Compliance Procedures (SFCP, Non-Willful)

The Streamlined Filing Compliance Procedures is one of the most common programs used by Taxpayers who are non-willful and qualify for either the Streamlined Domestic Offshore Procedures or Streamlined Foreign Offshore Procedures.

Streamlined Domestic Offshore Procedures (SDOP, Non-Willful)

Taxpayers who are considered U.S. residents and file timely tax returns each year but fail to report foreign income and/or assets may consider the Streamlined Domestic Offshore Procedures.

Streamlined Foreign Offshore Procedures (SFOP, Non-Willful)

Taxpayers who are foreign residents may consider the Streamlined Foreign Offshore Procedures which is typically the preferred program of the two streamlined procedures. That is because under this program Taxpayers can file original returns and the 5% title 26 miscellaneous offshore penalty is waived.

Delinquent FBAR Submission Procedures (DFSP, Non-Willful/Reasonable Cause)

Taxpayers who only missed the FBAR reporting and do not have any unreported income or other international information reporting forms to file may consider the Delinquent FBAR Submission Procedures — which may include a penalty waiver.

Delinquent International Information Returns Submission Procedures (DIIRSP, Reasonable Cause)

Taxpayers who have undisclosed foreign accounts and assets beyond just the FBAR — but have no unreported income — may consider the Delinquent International Information Return Submission Procedures. Before November 2020, the IRS was more inclined to issue a penalty waiver, but since then this type of delinquency procedure submission has morphed into a reasonable cause request to waive or abate penalties.

IRS Voluntary Disclosure Procedures (VDP, Willful)

For Taxpayers who are considered willful, the IRS offers a separate program referred to as the IRS Voluntary Disclosure Program (VDP). This program is used by Taxpayers to disclose both unreported domestic and offshore assets and income (before 2018, there was a separate program that only dealt with offshore assets (OVDP), but that program merged back into the traditional voluntary disclosure program (VDP).

Quiet Disclosure

Quiet disclosure is when a Taxpayer submits information to the IRS regarding the undisclosed foreign accounts, assets, and income but they do not go through one of the approved offshore disclosure programs. This is illegal and the IRS has indicated they have every intention of investigating Taxpayers who they discover intentionally sought to file delinquent forms to avoid the penalty instead of submitting to one of the approved methods identified above.

Current Year vs. Prior Year Non-Compliance

Once a Taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, Taxpayers should consider speaking with a Board-Certified Tax Law Specialist who specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties. 

Need Help Finding an Experienced Offshore Tax Attorney?

When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for Taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting. 

*This resource may help Taxpayers seeking to hire offshore tax counsel: How to Hire an Offshore Disclosure Lawyer.

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure.

Contact our firm today for assistance.