With the 2015 release of the “Panama Papers,” roughly 11.5 million documents detailing personal financial information of wealthy individuals and identifying nearly 215,000 offshore entities are now available to government authorities. That and other leaks, as well as the overall step-up in global efforts to curb tax avoidance, means that the heat is on for people with foreign investments to get their filings in order before it’s too late.
The Consequences of Doing Nothing
Coming into compliance is not an easy task, but the consequences of not doing so are far worse than the penalties for coming clean with the IRS. Following is what you face by keeping your assets hidden:
- The penalty for non-willful FBAR noncompliance is $10,000 per account, per year
- The penalty for willful FBAR noncompliance is the greater of $100,000 or 50% of the account balance each year, plus criminal penalties
- The penalties for failure to file Form 8938, Statement of Specified Foreign Financial Assets, are up to $10,000 for failure to disclose, plus $10,000 for each 30 days of non-filing following receipt of an IRS notice (up to $60,000), plus criminal penalties
- Civil penalties for tax fraud can be as much as 75% of the tax underpayment, in addition to the taxes that are owed
- Criminal penaltiesinclude fines of up to $250,000 for individuals ($500,000 for corporations), and up to 5 years’ imprisonment
That said, here are some options for coming into compliance with your foreign reporting:
The Offshore Voluntary Disclosure Program (OVDP)
The Offshore Voluntary Disclosure Program (OVDP) provides an opportunity for taxpayers who have willfully failed to report and pay tax to voluntarily come forward with previously undisclosed foreign assets and accounts. Note that you cannot take advantage of this program if you are already under investigation.
If you go into the OVDP, you should expect to pay a penalty of up to 50% of the account at its highest value. For example, let’s say someone opened a bank account in Switzerland in 2009 with a deposit of $500,000. The account has earned $25,000 annually. From 2009 through 2016, the highest account balance was $700,000. The total that person should expect to pay would be $276,500 plus interest, calculated as follows:
- Eight years of taxes, for a total of $70,000 ($8,750 x 8 years) plus interest
- A 20% accuracy-related penalty of $14,000 ($70,000 x 20% penalty)
- An offshore penalty of $192,500 ($700,000 x 27.5% penalty)
If you have unreported offshore income, moving quickly with the OVDP may be your best option. Although the penalties are harsh, they are still lower than doing nothing and they can protect you from criminal prosecution. (Under certain circumstances, it may be prudent to choose to “Opt-Out” of the OVDP, and allow a revenue agent to determine an appropriate penalty based on your specific facts and circumstances.)
Keep in mind that the IRS is currently targeting OVDP declines and withdrawals in a new audit campaign, so prompt resolution of your compliance issues is as important as ever. The tax team at Moskowitz, LLP can help you make an informed decision on how to proceed.
Our next post will continue with Streamlined Filing Compliance procedures for non-willful failure to file and "Quiet Disclosures."