Although the international tax team at LSL CPAs recognizes the positive inroads made by the Offshore Voluntary Disclosure Program, such success has come hand-in-hand with overly harsh and even unfair IRS offshore penalties. In her report, the National Taxpayer Advocate, Nina E. Olson, criticized the Internal Revenue Service’s amnesty programs. Olson clearly explained how the IRS offshore penalties accompanying the program “disproportionately burdening those who make honest mistakes.”
High IRS Offshore Penalties
In an annual process, Americans must disclose foreign accounts with more than $10,000 to the U.S. Treasury. Such accounts are disclosed by filing a Report of Foreign Bank and Financial Accounts, or FBAR. When you combine the over 7.6 million Americans living abroad with the large number of U.S. residents with offshore accounts, the number of unreported accounts is quite high. Considering these numbers, it is shocking that the IRS received only 807,000 FBAR submissions in 2012, as noted in the report. The actual number must be substantially higher.
Since 2009, more than 38,000 American taxpayers have stepped forward with undeclared foreign bank accounts as part of the various manifestations of the Offshore Voluntary Disclosure Program. The choice to step forward has been chiefly motivated by the prospect of reduced penalties and fines, plus the hope of avoiding prosecution. Although the latter has happened in most cases, the fines and penalties accompanying such disclosures have been higher than expected. In other words, it’s an amnesty program with quite a bite.
The total in back taxes, fines, and penalties collected so far has amounted to over $ 5.5 billion. According to Olson’s report, most taxpayers must opt into a voluntary disclosure program when they initially come clean. However, in a confusing twist that calls for the support of international tax experts, if these taxpayers want a fair financial accounting, they need to opt-out again and get audited. By opting out, such taxpayers were subject to IRS offshore penalties of nearly 70% of the unpaid tax and interest.
Although 70% might sound quite high, it is nothing compared to the IRS offshore penalties that American taxpayers who chose to remain in the disclosure programs ended up paying. By not opting out and being audited after a restructuring, they were penalized to a much greater degree financially. It is almost shocking that they were charged average penalties of more than double the unpaid tax and interest associated with their foreign bank and financial accounts that had gone unreported.
The Burden of IRS Offshore Penalties
The Taxpayer Advocate Nina E. Olson noted that education and burden reduction of these huge financial penalties could bring millions more taxpayers with international accounts into compliance. The Taxpayer Advocate’s report found the IRS’s tax evasion penalties to be “extraordinarily high” compared with other penalties the IRS administers. Taxpayers who entered the most recent version of the disclosure program paid, on average, penalties nearly four times the amount owed in taxes. Does this seem fair?
If you need to disclose foreign accounts and participate in the amnesty program, the international tax consultants at LSL CPAs have the experience you need to help you. We frequently work with tax attorneys to assist clients in the disclosure process.
Pursuant to U.S. Treasury Department Regulations, any federal tax advice in this article is not intended or written to be used for the purpose of (i) avoiding tax-related penalties under the Internal Revenue Code or (ii) promoting, marketing, or recommending to another party any tax-related matters addressed herein.
It is important to further note that this article presents only a partial view of the subject matter. It does not claim or attempt to be comprehensive or perfectly accurate. To learn more about how these issues might apply to your particular international accounts or financial holdings, please call LSL CPAs international tax accountant Yana Weaver at 714.569.1000.
