Is there Anywhere Left to Hide Offshore Accounts from the IRS?
Offshore Accounts. It appears that the IRS has mastered the art of the long con. Over the last ten years, the IRS has brought hundreds of thousands of individuals out of the shadows, by enticing them with IRS Offshore Voluntary Disclosure.
And, now that International/Offshore/Foreign Reporting has gained momentum (with many people just learning their options for compliance), the IRS is ending one of the biggest and longest-running programs, which OVDP.
With more than 110 countries, and 300,000 Foreign Financial Institutions agreeing to report U.S. Accountholder information to the IRS under FATCA (Foreign Account Tax Compliance Act), more and more people are learning about their IRS foreign reporting requirements.
With that said, instead of updating or revising OVDP, the IRS does an about face, cancels the OVDP ‘Program’ and basically says you’re on your own.
It is Unfair to the General Public
For many individuals that we represent, they only happened upon the knowledge about foreign reporting recently, and usually by one of the following ways:
- Local news in a foreign country
- Dinner Party
- Manafort Trial
- UBS Settlement
- Panama Papers
Now You Know About Foreign Reporting – What Can You Do?
It’s only been recent that the IRS has made international and offshore tax compliance a key enforcement priority. And, even though the FBAR/FinCEN 114 has been required since the 1970s, enforcement did not take center-stage until the introduction of FATCA, which did not begin enforcement until 2014.
In addition, many countries didn’t enter into FATCA Agreements until 2015 or 2016.
Thus, the IRS is essentially providing individuals with barely a few years to learn about the reporting rules, figure out which international tax reporting rules apply to them, assess their own situation, and get themselves into compliance.
That seems incredibly unfair, because it is incredibly unfair.
You Have to Be Careful
As you can see with situations like UBS (in which the bank made it appear that they would never turnover information about us account holders to the IRS) as well as the Panama Papers (you never know who at the foreign bank wants to be a hero and bring everyone else down) – there is no whether or not your foreign financial institution is a safe place for you to hide your money without the risk of being exposed.
And, if you are exposed before you have the opportunity to get into compliance, then you lose the opportunity to get into compliance to get into compliance.
OVDP Preclearance Rejection Letters On the Rise
Even though OVDP Preclearance is ending, it is important to note that in recent months many attorneys have been receiving rejection letters from the IRS on behalf of their clients.
We have had some clients rejected as well. A rejection occurs when the IRS CI (Criminal Investigation) reviews the Preclearance Letter, researches the clients background, and then based on their own records — rejects the client from OVDP.
Why Are People Being Rejected?
Here is where you have to separate fact from fiction. We have represented clients in several hundred offshore disclosure cases. We have had less than a handful of rejections, and when we followed up with the IRS to confirm why, we received the same response for both clients:
“The submission is untimely”
On both occasions, we are lucky enough to speak with a cooperative IRS agent who explained, without going into too much detail, that neither client was under civil or criminal investigation. Rather, the IRS simply already had the information in their database.
In other words, due to FATCA Reporting, the Foreign Financial Institutions where the clients banked had already reported the information to the IRS and the IRS had already updated their own database.
But The Bank Never Asked if I was a U.S. Person?
And there lies the problem for many U.S. accountholders. Oftentimes, these Foreign Financial Institutions are not warning their customers before submitting to the IRS. They are simply reporting anybody with any amount of money in their institution if the person has any sort of US US status for U. S. address on file.
For example, if a person resides in a foreign country and updates that bank to let them know they are relocating to the United States temporarily, that Foreign Financial Institution now has information on file in its system which shows that the person may be a US person — because they have a US address.
This is true, even if the foreign bank may not have your Social Security number, ITIN or other informaton. Rather, it is as simple as the bank has your name, has your address, believes you may be a US person, and instead of going tit-for-tat with the IRS as to who qualifies as a U.S. Person, they find it easier to just report the person – along with the thousands of other US persons at the institution – to the IRS.
We Specialize in IRS Voluntary Disclosure
We have successfully handled a diverse range of IRS Voluntary Disclosure cases. Whether it is a simple or complex case, safely getting clients into compliance is our passion, and we take it very seriously.
Unlike other attorneys who call themselves specialists but handle 10 different areas of tax law, purchase multiple domain names, and even practice outside of tax, we are absolutely dedicated to IRS Voluntary Disclosure.
No Case is Too Big; No Case is Too Small.
We represent all different types of clients. High net-worth investors (over $40 million), smaller cases ($100,000) and everything in-between.
We represent clients in over 60 countries and nationwide, with all different types of assets, including (each link takes you to a Golding & Golding free summary):
- Foreign Mutual Funds
- Foreign Life Insurance
- Fixing Quiet Disclosure
- Foreign Real Estate Income
- Foreign Real Estate Sales
- Foreign Earned Income Exclusion
- Subpart F Income
- Foreign Inheritance
- Foreign Pension
- Form 3520
- Form 5471
- Form 8621
- Form 8865
- Form 8938 (FATCA)
Who Decides to Enter IRS Voluntary Disclosure
All different types of people submit to IRS Voluntary Disclosure. We represent Attorneys, CPAs, Doctors, Investors, Engineers, Business Owners, Entrepreneurs, Professors, Athletes, Actors, Entry-Level staff, Students, and more.
You are not alone, and you are not the only one to find himself or herself in this situation.
…We even represent IRS Staff with getting into compliance.
Sean M. Golding, JD, LL.M., EA – Board Certified Tax Law Specialist
Our Managing Partner, Sean M. Golding, JD, LLM, EA is the only Attorney nationwide who has earned the Certified Tax Law Specialist credential and specializes in IRS Offshore Voluntary Disclosure and closely related matters.
In addition to earning the Certified Tax Law Certification, Sean also holds an LL.M. (Master’s in Tax Law) from the University of Denver and is also an Enrolled Agent (the highest credential awarded by the IRS.)
He is frequently called upon to lecture and write on issues involving IRS Voluntary Disclosure.
Less than 1% of Tax Attorneys Nationwide
Out of more than 200,000 practicing attorneys in California, less than 400 attorneys have achieved this Certified Tax Law Specialist designation.
The exam is widely regarded as one of (if not) the hardest tax exam given in the United States for practicing Attorneys. It is a designation earned by less than 1% of attorneys.
Our International Tax Lawyers represent hundreds of taxpayers annually in over 60 countries.
IRS Offshore Penalty List
The following is a list of potential IRS penalties for unreported and undisclosed foreign accounts and assets:
A Penalty for failing to file FBARs
United States citizens, residents and certain other persons must annually report their direct or indirect financial interest in, or signature authority (or other authority that is comparable to signature authority) over, a financial account that is maintained with a financial institution located in a foreign country if, for any calendar year, the aggregate value of all foreign financial accounts exceeded $10,000 at any time during the year. The civil penalty for willfully failing to file an FBAR can be as high as the greater of $100,000 or 50 percent of the total balance of the foreign financial account per violation. See 31 U.S.C. § 5321(a)(5). Non-willful violations that the IRS determines were not due to reasonable cause are subject to a $10,000 penalty per violation.
FATCA Form 8938
Beginning with the 2011 tax year, a penalty for failing to file Form 8938 reporting the taxpayer’s interest in certain foreign financial assets, including financial accounts, certain foreign securities, and interests in foreign entities, as required by IRC § 6038D. The penalty for failing to file each one of these information returns is $10,000, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50,000 per return.
A Penalty for failing to file Form 3520
Annual Return to Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts. Taxpayers must also report various transactions involving foreign trusts, including creation of a foreign trust by a United States person, transfers of property from a United States person to a foreign trust and receipt of distributions from foreign trusts under IRC § 6048. This return also reports the receipt of gifts from foreign entities under IRC § 6039F. The penalty for failing to file each one of these information returns, or for filing an incomplete return, is the greater of $10,000 or 35 percent of the gross reportable amount, except for returns reporting gifts, where the penalty is five percent of the gift per month, up to a maximum penalty of 25 percent of the gift.
A Penalty for failing to file Form 3520-A
Information Return of Foreign Trust With a U.S. Owner. Taxpayers must also report ownership interests in foreign trusts, by United States persons with various interests in and powers over those trusts under IRC § 6048(b). The penalty for failing to file each one of these information returns or for filing an incomplete return, is the greater of $10,000 or 5 percent of the gross value of trust assets determined to be owned by the United States person.
A Penalty for failing to file Form 5471
Information Return of U.S. Persons with Respect to Certain Foreign Corporations. Certain United States persons who are officers, directors or shareholders in certain foreign corporations (including International Business Corporations) are required to report information under IRC §§ 6035, 6038 and 6046. The penalty for failing to file each one of these information returns is $10,000, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50,000 per return.
A Penalty for failing to file Form 5472
Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business. Taxpayers may be required to report transactions between a 25 percent foreign-owned domestic corporation or a foreign corporation engaged in a trade or business in the United States and a related party as required by IRC §§ 6038A and 6038C. The penalty for failing to file each one of these information returns, or to keep certain records regarding reportable transactions, is $10,000, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency.
A Penalty for failing to file Form 926
Return by a U.S. Transferor of Property to a Foreign Corporation. Taxpayers are required to report transfers of property to foreign corporations and other information under IRC § 6038B. The penalty for failing to file each one of these information returns is ten percent of the value of the property transferred, up to a maximum of $100,000 per return, with no limit if the failure to report the transfer was intentional.
A Penalty for failing to file Form 8865
Return of U.S. Persons With Respect to Certain Foreign Partnerships. United States persons with certain interests in foreign partnerships use this form to report interests in and transactions of the foreign partnerships, transfers of property to the foreign partnerships, and acquisitions, dispositions and changes in foreign partnership interests under IRC §§ 6038, 6038B, and 6046A. Penalties include $10,000 for failure to file each return, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50,000 per return, and ten percent of the value of any transferred property that is not reported, subject to a $100,000 limit.
Fraud penalties imposed under IRC §§ 6651(f) or 6663
Where an underpayment of tax, or a failure to file a tax return, is due to fraud, the taxpayer is liable for penalties that, although calculated differently, essentially amount to 75 percent of the unpaid tax.
A Penalty for failing to file a tax return imposed under IRC § 6651(a)(1)
Generally, taxpayers are required to file income tax returns. If a taxpayer fails to do so, a penalty of 5 percent of the balance due, plus an additional 5 percent for each month or fraction thereof during which the failure continues may be imposed. The penalty shall not exceed 25 percent.
A Penalty for failing to pay the amount of tax shown on the return under IRC § 6651(a)(2)
If a taxpayer fails to pay the amount of tax shown on the return, he or she may be liable for a penalty of .5 percent of the amount of tax shown on the return, plus an additional .5 percent for each additional month or fraction thereof that the amount remains unpaid, not exceeding 25 percent.
An Accuracy-Related Penalty on underpayments imposed under IRC § 6662
Depending upon which component of the accuracy-related penalty is applicable, a taxpayer may be liable for a 20 percent or 40 percent penalty
Possible Criminal Charges related to tax matters include tax evasion (IRC § 7201)
Filing a false return (IRC § 7206(1)) and failure to file an income tax return (IRC § 7203). Willfully failing to file an FBAR and willfully filing a false FBAR are both violations that are subject to criminal penalties under 31 U.S.C. § 5322. Additional possible criminal charges include conspiracy to defraud the government with respect to claims (18 U.S.C. § 286) and conspiracy to commit offense or to defraud the United States (18 U.S.C. § 371).
A person convicted of tax evasion
Filing a false return subjects a person to a prison term of up to three years and a fine of up to $250,000. A person who fails to file a tax return is subject to a prison term of up to one year and a fine of up to $100,000. Failing to file an FBAR subjects a person to a prison term of up to ten years and criminal penalties of up to $500,000. A person convicted of conspiracy to defraud the government with respect to claims is subject to a prison term of up to not more than 10 years or a fine of up to $250,000. A person convicted of conspiracy to commit offense or to defraud the United States is subject to a prison term of not more than five years and a fine of up to $250,000.
What Should You Do?
Everyone makes mistakes. If at some point that you should have been reporting your foreign income, accounts, assets or investments the prudent and least costly (but most effective) method for getting compliance is through one of the approved IRS offshore voluntary disclosure program.