subject: The 4 Things You Want To Know About Irs Offshore Voluntary Disclosure [print this page] The IRS has power to impose a tax on income from around the globe. The Internal Revenue Service has universal jurisdiction to tax income anywhere it is earned --- even it was earned on the moon. Not only that, it is a crime not to tell the Internal Revenue Service about foreign accounts if their value exceeds $10,000.00 by filing an FBAR form every June. For those people in non-compliance, the Internal Revenue Service ran two offshore voluntary disclosure initiatives (OVDI). The last one passed on August 31, 2011. For those people wondering what to do, this piece discusses their four remaining options.
The first option is to do nothing except hope and pray. The benefit is that it costs zero to do, and there is certainly a likelihood of greater than zero, no matter how minor, that the taxpayer can get away with the crime. The downside that is if discovered, there is an extraordinary emotional strain for anybody who become a criminal defendant. Even if acquitted, the entire process will be the most arduous time of someone's life. Even if found not guilty, a criminal trial is still incredibly costly.
This is an fundamental disadvantage. The chances are that the IRS does not discover undisclosed accounts gets smaller and smaller. Why? Because in order to compete for American customer and capital, foreign banks are coerced into complying with the Internal Revenue Service. That's right --- foreign banks take their marking orders from the Internal Revenue Service as well. So if the Internal Revenue Service wants information on American holders of foreign accounts, the Internal Revenue Service will get that information. The IRS will also run names of other individuals it suspects of being US citizens but who opened their accounts with foreign passports. The IRS has more power and intelligence that it ever had before. The Internal Revenue Service has the manpower and field agents in every major city around the globe.
Option 2: Renounce citizenship; Leave the country. There is only way to escape the jurisdiction of the IRS taxing authority. That is, to renounce one's citizenship and no longer be a American citizen. The process is complicated. Additionally, a requirement of proper expatriation is that a citizen has to be in compliance with all tax laws and pay an expatriation tax in order to make it official. If you fail to expatriate properly, you would still be subject to the jurisdiction of the American, meaning nothing was accomplished and you are still subject to all the requirements of the tax code. Renouncing your citizenship only gets rid of future tax liabilities, but you have to disclose the existence of unreported accounts first.
Option 3: Soft (or quiet) disclosure. An option that some taxpayers tried is to file amended tax forms 1040X's and mail them to the IRS just think "regular" 1040X's, pay the taxes, and hope the Internal Revenue Service won't figure out what was going on. Sounds think a good strategy, right? Perhaps one could avoid all those excessive penalties of the OVDI programs?
The Department of Justice states that it has begun prosecutions on people who have attempted soft disclosures. So this option has some serious problems
There are other problems with "Quiet Disclosures." One reason is that a soft disclosure does not remedy the problem of the taxpayer's failure to report the bank account on the FBAR; as a willful failure to file an FBAR is a criminal charge. So simply filing a soft disclosure does not go far enough to remove any possibility of criminal investigations. In fact, the 1040X may --- well here's the problem with this alternative --- the soft disclosure does nothing about the failure to FBAR forms. There are still criminal and civil investigations that may be pending for failing to file an FBAR, but simply give the Internal revenue service a roadmap to find you.
The forth option is a pre-emptive disclosure and subsequent negotiation of the penalties. This is the optimal solution. Even though the time to file under the 2011 OVDI has passed, it is not too late. The only deal that passed on August 31, 2011 was the particular off-the-shelf terms of the 2011 OVDI. It was simply a pre-agreed upon penalty structure. The Internal revenue service always welcomes voluntary disclosures.
There are only two requirements. First, the taxpayer can not be under examination. In addition, the source of the money in the foreign bank accounts can not be from an illegal source. Think drug trafficking or money laundering.
If someone is still questioning what the proper course of action is, it is imperative that they only talk to a qualified foreign tax attorney. The attorney-client privilege only applies in communications to an lawyer. The IRS can subpoena nearly anyone else to give evidence against a taxpayer.
