IRS Lightens Up On Offshore Banking Disclosure Program

The IRS has made significant modifications to its Offshore Voluntary Disclosure Program (OVDP) in response to a public outcry of what many thought to be confiscatory penalties that were assessed on U.S. taxpayers who held offshore accounts but non-willfully failed to disclose them. The IRS considers non-willful conduct to be due to negligence, inadvertence, mistake or conduct that is the result of a good faith misunderstanding of the law.For the first time, U.S. Taxpayers who reside in the United States may be eligible. If their failure to disclose is non-willful, the only penalty will be a miscellaneous offshore penalty equal to 5% of the account. For eligible U.S. taxpayers residing outside the United States, all penalties will be waived. More significantly, not only do taxpayers who make the voluntary disclosure avoid substantial civil penalties, but they also generally eliminate the risk of criminal prosecution.If that is not enough incentive to come forward consider that the Foreign Account Tax Compliance Act (FATCA) took effect worldwide as of July 1, 2014. FATCA gives the IRS access to information regarding foreign accounts of individuals via intergovernmental agreements either signed directly with other countries or directly from foreign financial institutions. To date, 102 countries have either signed agreements or have reached agreements in substance and have consented to being included on the list.Although the OVDP is now more forgiving to non-willful taxpayers, the government is very serious about disclosure and it isn’t just about collecting taxes owed. After the 9/11 terrorist attacks the Treasury, via the Patriot Act, was given the mission to “safeguard the financial system from illicit use and combat money laundering and promote national security”. Possible criminal charges for willful non-disclosure include tax evasion, conspiracy to defraud the government with respect to claims and conspiracy to commit offense or to defraud the United States. If found guilty, a taxpayer could face a prison term of up to ten years and penalties of up to $500,000. Additionally, civil penalties can be as high as the greater of $100,000 or 50% of the total balance of the foreign financial account – per violation.All things considered, it appears that the days of keeping secret foreign accounts may soon be over for U.S. taxpayers. It is not known when the IRS will end the more taxpayer friendly Offshore Voluntary Disclosure Program. Therefore, tax advisors should inform their clients of the disclosure requirements to take advantage of the reduced penalties and to prevent them from unknowingly breaking the law in the future.