IRS Changing Terms for Offshore Account Holders

U.S. taxpayers hiding assets abroad should take note of the Internal Revenue Service’s plan to sharply increase penalties for such acts, while those who unintentionally fail to disclose offshore accounts will experience much more leniency.

The IRS’s June 18 changes to offshore disclosure programs constitute the latest in the U.S. government’s five-year-old campaign to oust millions of U.S. taxpayers who live abroad or have accounts in other countries in hopes of retrieving lost tax dollars. The campaign also includes a new law, the Foreign Account Tax Compliance Act (FATCA) set to rollout July 1, that requires foreign financial entities to report information regarding their U.S. account holders to the U.S. government.

The IRS has managed to collect $6.5 billion in taxes, interest and penalties from more than 45,000 taxpayers who have disclosed their accounts voluntarily. Federal prosecutors have filed more than 100 criminal indictments since the campaign’s origin in 2009.

Despite the reduced penalty structure offered by the disclosure programs, record numbers of U.S. taxpayers are choosing to renounce their citizenship or turn in their green cards as a response to what has been seen as tougher enforcement and stiffer penalties. The IRS has been accused of unfairly cracking down on taxpayers with small accounts who were simply unaware of the filing requirements.

The IRS has acknowledged the criticism. “Our aim is to get people to disclose their accounts, pay the tax they owe and get right with the government,” IRS Commissioner John Koskinen said in a statement, adding that “a compliance regime that is too harsh won’t net the desired result.”

By offering less onerous document requirements and a significantly reduced civil penalty, the agency’s latest changes make it easier for taxpayers who are not intentionally violating the law to approach the IRS.

“The changes will help many people both in the U.S. and abroad who didn’t mean to cheat on their taxes by having offshore accounts,” said Seth Entin, a lawyer at Greenberg Traurig LLP in Miami who has handled hundreds of taxpayer disclosures. “But it pushes people who have been trying to hide money abroad to come forward to the IRS sooner.”

Taxpayers should be aware that it will still be the IRS that ultimately decides which taxpayers failed to comply with the law intentionally and which ones acted non-willfully. Though the taxpayer and their representative can decide whether they believe a reduced penalty structure should apply, and present that position to the IRS, the agency reserves the right to reject that position and pursue additional penalties.

Those who choose to continue to hide offshore accounts could face much harsher penalties under the new rules. If a taxpayer waits to enter into a disclosure program until after it becomes public knowledge that the financial institution holding their account is under investigation by U.S. authorities, penalties increase to 50% of the aggregate balances in all undisclosed accounts, regardless of whether additional accounts were held at other institutions. On the other hand, many taxpayers will find relief in the new rules that will offer a far wider range of taxpayers the ability to qualify for lower penalties, or none at all. Prior to the changes, only taxpayers who owed less than $1,500 in each tax year could qualify- a figure that many were unable to meet. Now the agency will eliminate that requirement and others for taxpayers who made unintentional violations.

U.S. taxpayers living abroad who are granted reprieve for violations that the IRS determines to be unintentional will only be held liable for taxes and related interest they owe for the previous three years. U.S. taxpayers residing within the U.S. could face penalties capped at 5% in addition to any taxes and interest owed.

“While these modifications don’t address all our concerns, I believe they are a significant step in the right direction,” Nina Olson, the national taxpayer advocate, an official IRS ombudsman, said in a statement.

Taxpayers who have already initiated disclosures with the IRS under one of the Offshore Voluntary Disclosure Programs may still be eligible for these reduced penalties.

At Brown PC, our experienced tax attorneys stay on top of changes in tax law and IRS procedures to make sure that our clients do not pay any more than they have to when disclosing their foreign accounts. We have studied these new offshore programs in detail and are ready to discuss your options and risks.

Source: Pleven, Liam, “IRS Eases Up on Accidental Tax Cheats,” The Wall Street Journal, June 18th, 2014