Skip to Content

Voluntary Disclosure and Offshore Accounts

March 27, 2017


The Internal Revenue Service has announced a new program that would potentially lower penalties for offshore accounts. This is a six-month program, announced on March 23 and in effect until September 23, 2009.

In President Barack Obama’s budget, he proposed collecting $210 billion in the next ten years from international enforcement and other tax reform. Experts estimate that the U.S. Treasury loses between $50 and $100 billion per year because of offshore accounts.

In an effort to encourage taxpayers with unreported offshore accounts to come forward, the IRS is offering financial penalties that are substantially lower than potential penalties under current law. Also, the threat of criminal prosecution is being taken off the table for those who come forward and meet the IRS voluntary disclosure requirements.

Penalties for Offshore Accounts

Prior to the creation of this program, taxpayers faced penalties up to 50 percent of the value of the account for each year. The penalty could equal the total value of the account after two years. There is also a fraud penalty of 75 percent of the tax owed. The criminal penalty could be a fine of up to $250,000 and/or a prison sentence of up to five years.

Those who qualify for the voluntary disclosure program will have to pay taxes and interest going back six years. The penalties will be either an accuracy penalty of 20 percent of the tax owed or a delinquency penalty of 25 percent. (An accuracy penalty is for understating taxes and a delinquency penalty is for not paying on time.) In addition, there will be a penalty of 20 percent of the value of the account for the year the account had the highest value. There is a penalty of only 5 percent available to those who inherited an account and just failed to pay taxes on the earnings. Although the amount of taxes and penalties could still be significant, it is much less onerous than the financial penalties that exceed the value of the account or a prison sentence.

Voluntary Disclosure

Basically, to qualify for voluntary disclosure you need to contact the IRS before they contact you. If the IRS has already begun a civil examination or a criminal investigation, or has obtained your name from a third party, it is too late to come forward and qualify for voluntary disclosure.

It is not sufficient to send the IRS a letter and say you think you might owe some back taxes. The communication with them must be truthful, timely and complete. That is defined by the IRS as showing a willingness to cooperate and making arrangements to pay all the tax, interest and penalties that are due. It is very important in this situation to talk to an attorney or tax advisor to determine your legal rights and obligations.

UBS Case

There has been an ongoing U.S. government investigation into UBS, a Swiss bank and one of the largest private banks in the world. The IRS had a tax fraud case pending against UBS when a settlement was reached with UBS paying $780 million in back taxes and penalties. The names of a few hundred account holders were released as part of that settlement. In addition, the IRS filed a lawsuit to require UBS to reveal the names of 52,000 American account holders. At a hearing in the House of Representatives, it was estimated that the accounts represent $14 billion in assets.

Although under the usual guidelines for voluntary disclosure, a third party notifying the IRS would make you ineligible, the IRS has indicated that UBS account holders may still be eligible.

The Future of Offshore Accounts

As mentioned earlier, the president is planning to capture some of the revenue lost to the federal government through these accounts. The IRS has increased the number of audits in this area and is hiring more staff with expertise in international investigations. There is legislation pending in both the House and Senate that would provide tools to help increase the ability of the IRS to enforce these tax laws through penalties and additional reporting requirements.

There will be a short window of opportunity to come forward and face decreased penalties, otherwise, according to IRS Commissioner Doug Shulman, “For taxpayers who continue to hide their head in the sand, the situation will only become more dire. They should come forward now under our voluntary disclosure practice and get right with the government.”