This post updates and rehashes my earlier post on the 2011 Offshore Voluntary Disclosure “Initiative.” The initiative is now a “Program” with no stated deadline. As of this date, the IRS has not yet published the official guidelines for the program other than to inform us that the OVDP penalty for failure to disclose offshore accounts will be 27.5% of the highest aggregate balance in foreign bank accounts/entities or value of foreign assets. It is presently unclear whether the examination period will look back eight or nine years. Otherwise, we expect the guidelines to remain substantially similar to those for the 2011 program. I will update this post as the IRS makes more information available.
Are You Feeling Lucky?
You may be on the fence as to whether you want to raise your hand and tell the IRS you’ve been moving money around overseas for the past 20 years. You may also be considering rolling the dice and betting that you won’t be caught. Or, you may be thinking that I’ll “quietly disclose” by beginning to report my foreign account this year and hope the IRS never investigates.
Of course, one risk you’re running is criminal investigation and prosecution by the IRS. This could be jail time if you’re caught. Escape from Alcatraz aside, let’s focus on the monetary advantages offered by participation in the program. Below I will walk you through a sample scenario offered by the IRS to show you just how much money you are risking by not disclosing.
The Taxpayer Comes Forward
Here is how it works if you choose to participate in the plan. The values of your accounts and other assets are aggregated for each year and the penalty is calculated at 27.5 percent of the highest year‘s aggregate value during the period covered by the voluntary disclosure. The period in play when participating in the program are the years 2003-2010. For example, assume the taxpayer has the following amounts in a foreign account over the period covered by his voluntary disclosure.
|Year||Amount on Deposit||Interest Income||Account Balance|
NOTE: To keep things simple, this example does not provide for compounded interest, and assumes the taxpayer is in the 35-percent tax bracket, does not have an investment in a Passive Foreign Investment Company (PFIC), files a return but does not include the foreign account or the interest income on the return, and the maximum applicable penalties are imposed.
If the taxpayers comes forward and their voluntary disclosure is accepted by the IRS, they face this potential scenario:
They would pay $518,000 plus interest. This includes:
- Tax of $140,000 (8 years at $17,500) plus interest,
- An accuracy-related penalty of $28,000 (i.e., $140,000 x 20%), and
- An additional penalty, in lieu of the FBAR and other potential penalties that may apply as discussed below, of $385,000 (i.e., $1,400,000 x 27.5%).
The Taxpayer Rolls the Dice on Not Getting Caught
If the taxpayers don’t come forward, if the IRS discovers their offshore activities, they would face up to $4,543,000 in tax, accuracy-related penalty, and FBAR penalty. The taxpayers would also be liable for interest and possibly additional penalties, and an IRS examination could lead to criminal prosecution.
The civil liabilities outside the 2012 Offshore Voluntary Disclosure Progarm potentially include:
- Tax of $140,000 (8 years at $17,500) plus, accuracy-related penalties, and, if applicable, the failure to file and failure to pay penalties, plus interest;
- FBAR penalties of up to 50% of the account balance of each year. This totals up to $4,375,000 for willful failure to file complete and correct FBARs (2004 – $550,000, 2005 – $575,000, 2006 – $600,000, 2007 – $625,000, 2008 – $650,000, and 2009 – $675,000, and 2010 – $700,000);
- The potential of having the fraud accuracy penalty of 75% apply, and
- The potential of substantial additional information return penalties if the foreign account or assets is held through a foreign entity such as a trust or corporation and required information returns were not filed.
Note that if the foreign activity started before the program period (2003 or 2004, TBD), the Service may examine tax years prior to the program period if the taxpayer does not participate in the 2012 OVDP.
Lower Penalty For Some Taxpayers
In the 2012 OVDP, we expect some taxpayers will continue to be eligible for 5% and 12.5% OVDP penalties. The penalty can be reduced to 5% in a case where the taxpayer inherited foreign accounts, withdrew no more than $1,000 from those inherited accounts, and did not direct the investment of those accounts. If, in each of the years covered by the 2012 OVDP, the largest aggregate account balance is less than $75,000, the penalty is reduced to 12.5% of the largest account balance. We expect these percentages will not change from the 2011 OVDI to the 2012 OVDP.
The Bottom Line
As you can see, participation in the program comes in at an approximate cost of $518,000 plus interest and non-participation comes in at an approximate cost of up to $4,543,000. In many scenarios, being caught outside the benefits of the program will result in the tax, penalty and interest consuming more than the value of the offshore accounts. Of course, there is also the jail time to consider. I hope this helps put things in prospective in a language we can all understand, dollars and cents.
As Clint Eastwood once inquired, are you feeling lucky? As of now, California is not offering a similar initiative as they did in 2011.
Contact us to discuss your options – 415-781-4000.