Last week the IRS announced its 2011 Voluntary Offshore Disclosure Program which provides for reduced penalties and assurance of non-criminal prosecution if US Taxpayers who have not been reporting their foreign bank accounts, foreign corporations, foreign trusts (Fideicomisos), etc. come forward and tell all. The previous such program which existed for part of 2009 flushed out over 15,000 taxpayers who had not been filing and reporting their foreign activities.
The new program requires you file returns or amend returns you have failed to include your foreign income on for the past 8 years. Your incentive to enter is reduced penalties for failing to file or report the following items on the proper forms: (1) Foreign bank account forms (2) foreign corporation, partnership or LLC forms (3) foreign trust forms (required from Fideicomiso beneficiaries in Mexico) and reporting Passive Foreign Investment Company income.
Many of the required IRS reporting forms for these activities provide for penalties of $10,000 or more per year for filing the form late or not filing it at all. The 2011 Program reduces these penalties to 25% of the highest value of those assets (for any one tax year which is part of the 8 years involved) which can often be less than the $10,000 per year normal penalty. In certain specific circumstances set forth in the 28 page document the IRS has issued describing the rules of the program the regular 25% penalty may be reduced to 5 or 15%. The IRS will also assess interest and negligence penalties of 20% for any unreported taxable income also.
The IRS is getting a lot tougher with Americans who have unreported income and assets abroad. The rules do not distinguish between the wealthy or average individual taxpayers. Based on the history of their previous 2009 Offshore Disclosure program, the agents conducting the program generally follow the rules closely and are not allowed to negotiate or make any special deals outside the guidelines of that program.
Many taxpayers have asked how they can find out about my activities in a foreign country. There are tax treaties with many countries which allows the IRS to get information about US Citizens and their activities in that country. The IRS also has a very successful program of paying a finder’s fee to anyone (it does not have to be a US person) who supplies them with information on Americans who are not paying their US taxes. Under that program we know of one foreign banker who now stands to make millions of dollars for giving the IRS a list of US depositors who were not reporting their offshore assets and earnings. He is being paid a percentage of the taxes ultimately collected.
The IRS in the past few years has hired approximately 20,000 new employees in its international department to conducts these new programs. The new budget for 2012 includes an additional 5,100 employees for the IRS. Due to the changes that are taking place it would appear to be wise to “come clean” before things get dirty.
The good news is that if you have been reporting all of your foreign income, but have just failed to file the reporting forms such as the FBAR form (foreign bank account reporting) or Form 5471 (foreign corporations) or Form 3520 (foreign trusts-Fideiciomisos), you do not have to enter the program, but do need to file all applicable past year reporting forms in compliance with the law prior to the deadline.
The program ends on August 31, 2011. The IRS may not do this again. If you have failed report foreign assets and income, do not enter the Voluntary Offshore Disclosure Program, and are later discovered by the IRS, it has stated it will impose all penalties to the maximum extent allowed by law and very likely seek criminal prosecution. As computers and information sharing become more common, it is not wise to ignore this opportunity. The IRS has indicated they do not plan to keep offering this program in the future.
Due to the complex nature and procedures of the program, and possible criminal ramifications, it is best to have an attorney represent you along with a CPA to help you comply with the forms and documentation requested. You can read more about the Program and its 58 frequently asked questions which describe all aspects of its operation at www.expatattorneycpa.com/offshoredisclosure.html
About the Author: Don D. Nelson is a US tax attorney and CPA who has been assisting clients in over 40 countries around the world with their Expatriate and International Tax Planning and tax return preparation for over 30 years. He offers his client the privacy of “attorney-client”privilege which is not available from CPAs or other tax preparers. He has represented hundreds of expatriate clients prepare and file many years past returns when they have fallen behind on their US filing obligation.