Do You Know Your Choices With Tax Voluntary Disclosure

If you are an American taxpayer with an offshore foreign bank accounts that you thought were secret, you must bring it into compliance - that is file missing FBARs and include any missing income on amended tax returns. So what to do? The last offshore voluntary disclosure initiative (OVDI) ended on August 31, 2011. These are the four options still available.

Option One: Do nothing. You could do nothing and hope that the IRS does not come across the account. Perhaps your account is at a foreign bank that you believe to be "off the radar" or is in a quiet country, or under a friend's name, or opened with a non-American passport. Well, it used to be that a bank account's actual owner could be kept fairly secret. However, now, the Internal Revenue Service has vastly many more weapon at its disposal than it did previously to find unreported accounts.


This is an important caveat. The chances are that the Internal Revenue Service does not discover secret accounts gets more and more remote. Why? Because in order to compete for American customer and capital, foreign banks are coerced into complying with the Internal Revenue Service. That's right --- foreign banks take their marking orders from the Internal Revenue Service as well. So if the IRS wants information on American holders of foreign accounts, the IRS will get that information. The Internal Revenue Service will also run names of other people it suspects of being American citizens but who opened their accounts with foreign passports. The IRS has incredible investigative powers --- powers it never had before.

Option 2: Renounce citizenship; Leave the country. Do you want to say goodbye to the IRS? There is only one way to do it. That is, to renounce one's citizenship and no longer be a American citizen. The process is not as easy as you may think. Additionally, a requirement of recognizable expatriation is that a citizen has to be in compliance with all tax laws and pay an expatriation tax in order to make it official. If you fail to expatriate properly, you would still be subject to the jurisdiction of the American, meaning nothing was accomplished and you are still subject to all the requirements of the tax code. Renouncing your citizenship only gets rid of future tax liabilities, but you have to disclose the existence of unreported accounts first.

Option 3: Soft (or quiet) disclosure. One option is to file amended returns, this time including previously unreported income - simply filing the returns as if it were simply forgotten income. Doesn't this seems like a fool-proof game-plan? Perhaps one could avoid all those excessive penalties of the OVDI programs?

The Internal revenue service says that these amended returns are "red flags." Even though the tax returns are amended and back taxes paid, the Internal revenue service tells says that foreign account holders will still face penalties and criminal charges. In addition to charging and prosecuting people with undeclared foreign income, the Department of Justice claims that it has also begun prosecution of taxpayers whose "Quiet Disclosures" were discovered by the Internal revenue service.

The "soft" disclosure option is incredibly risky for several reasons. One massive failing is that they do not address the problem of the taxpayer's failure to report the bank account on the FBAR; failing to filing an FBAR can be a criminal charge just by itself. As a result filing a soft disclosure 't go far enough to remove any possibility of criminal investigations. In fact, the 1040X may --- well here's the terrific dilemma with this option --- it does nothing about the failure to the FBAR. There are still criminal and civil investigations that may be pending for failing to file an FBAR, but simply give the IRS a roadmap to locate you.

Option 4: Pre-emptive Disclosure and Negotiation (" Offshore Voluntary Disclosure Initiative") This is the best option. Even though the time to file under the 2011 OVDI has passed, there is time to act. The only deal that passed on August 31, 2011 was the particular off-the-shelf terms of the 2011 disclosure. The 2011 OVDI was simply a pre-agreed upon penalty structure. The IRS always welcomes voluntary disclosures.

There are only two requirements. Initially, the taxpayer can not be under examination. Also, the source of the funds in the foreign bank accounts can not be from an illegal source. Like drug trafficking or money laundering.

If someone is still wondering what the proper course of action is, it is critical that they only speak to a qualified offshore tax attorney. The attorney-client privilege only applies in communications to an attorney. The IRS can subpoena nearly anyone else to testify against a taxpayer.

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