United States citizens and resident aliens who maintain offshore financial accounts with assets of $10,000 or more at any time during a calendar year, in addition to reporting and paying income tax on the investment income from these accounts, are required to report the existence of these accounts to the Department of the Treasury by filing Form 90-22.1 on or before June 30, 2009.
As has been widely reported, approximately 52,000 Americans had accounts with UBS AG in Switzerland and it is projected that some 30,000 of these individuals failed to report the investment income earned from these accounts nor did they report the existence of these accounts to the Department of the Treasury by filing Form 90-22.1.
Voluntary Disclosure Program
In late March 2009 the Internal Revenue Service announced a 6 month voluntary disclosure period that will end on September 23, 2009, during which taxpayers have the opportunity to file amended tax returns for the past 6 years.
According to the Internal Revenue Service “the objective of the new initiative is to bring taxpayers that have used undisclosed foreign accounts and undisclosed foreign entities to avoid or evade tax into compliance with United States tax laws. Additionally, the information gathered from taxpayers making voluntary disclosures under this practice will be used to further the IRS’s understanding of how foreign accounts and foreign entities are promoted to United States taxpayers as ways to avoid or evade tax.”
Why Should I Make A Voluntary Disclosure?
The Internal Revenue Service has stated that “taxpayers with undisclosed foreign accounts or entities should make a voluntary disclosure because it enables them to become compliant, avoid substantial civil penalties and generally eliminate the risk of criminal prosecution. Making a voluntary disclosure also provides the opportunity to calculate, with a reasonable degree of certainty, the total cost of resolving all offshore tax issues. Taxpayers who do not submit a voluntary disclosure run the risk of detection by the Internal Revenue Service and the imposition of substantial penalties, including the fraud penalty and foreign information return penalties, and an increased risk of criminal prosecution.”
“The Voluntary Disclosure Practice is a longstanding practice of Internal Revenue Service Criminal Investigation of taking timely, accurate, and complete voluntary disclosures into account in deciding whether to recommend to the Department of Justice that a taxpayer be criminally prosecuted. It enables noncompliant taxpayers to resolve
their tax liabilities and minimize their chances of criminal prosecution. When a
taxpayer truthfully, timely, and completely complies with all provisions of the
voluntary disclosure practice, the Internal Revenue Service will not recommend criminal prosecution to the Department of Justice.”
How Is the Tax, Penalty and Interest Imposed?
Assume the taxpayer is in the 35% bracket and deposited $1,000,000 in a foreign account in 2003, earned $50,000 in interest income each year for 6 years that was not reported and had $1,300,000 in the account at the end of 2008.
If the taxpayer comes forward and has their voluntary disclosure accepted by the Internal Revenue Service, they would likely pay:
Income tax - $50,000 x 35% = $17,500 x 6 years = $105,000
Accuracy penalty - $105,000 x 20% = $21,000
Additional penalty - $1,300,000 x 20% = $260,000
Total - $386,000 plus compounded interest
What If the Individual Does Nothing and Is Caught?
According to the Internal Revenue Service, “if the taxpayer didn’t come forward and the Internal Revenue Service discovered their offshore activities, they face up to $2,306,000 in tax, accuracy-related penalty, and the Foreign Bank Account Reporting (FBAR) penalty. The taxpayer would also be liable for interest and possibly additional penalties, and an examination could lead to criminal prosecution.”
What Is the Threshold for Criminal Prosecution?
According to a criminal attorney the current guideline appears to be that if an individual avoided a total of about $250,000 in income tax over a 3 year period and does not enter the voluntary compliance program, if caught, this individual should expect to spend 5 to 7 years in a U.S. prison, in addition to the aforementioned penalties being imposed.
Commentary
The current administration is actively seeking new sources of revenue and has made the international noncompliance a primary focus of their effort. A deputy commissioner has emphasized in a recent memorandum that offshore cases sent to the field for examination are to have the highest priority. For those taxpayers who continue to believe that they can continue to hide their offshore accounts from the Internal Revenue Service their condition can best be described as “dire.”
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