The IRS has authority to tax income from around the globe. The Internal Revenue Service has universal jurisdiction to tax income anywhere it is earned --- even it was earned on the moon. Not only that, it is a crime not to tell the IRS about foreign accounts if their value exceeds $10,000.00 by filing an FBAR form every June. The IRS offered two previous offshore voluntary disclosure initiatives. One in 2009 and the last one in 2011. The last one passed on August 31, 2011. For those people wondering what to do, this piece discusses their four remaining options.
The first option is to do nothing except hope and pray. The benefit is that it costs nothing to do, and there is certainly a possibility, no matter how slight, that the taxpayer can get away with the crime. The disadvantages are that if discovered, the penalties are harsh. In both financial cost and in emotional drain of being charged with a federal crime. Even if found not guilty, a criminal trial is still incredibly costly.
This is an fundamental disadvantage. The chances are that the IRS does not discover hidden accounts gets smaller and smaller. Why? Because in order to compete for US customer and capital, foreign banks are coerced into complying with the IRS. That's right --- foreign banks take their marking orders from the Internal Revenue Service as well. So if the Internal Revenue Service wants information on US holders of foreign accounts, the Internal Revenue Service will get that information. The IRS will also run names of other people it suspects of being American citizens but who opened their accounts with foreign passports. The Internal Revenue Service 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 complicated. Furthermore, a requirement of recognizable expatriation is that you have 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. Expatriation may make sense to avoid future tax liabilities , but you have to inform the IRS about the existence of hidden financial accounts first.
This third way is to quietly filed amended 1040X's and not mention to the Internal Revenue Service that you are seeking to voluntarily disclose. This is known as a "quiet" or "soft" disclosure. This is basically a "cheap" alternative and that's is only advantage . But the horrible possibilities are that you may give the IRS a roadmap to charge you criminally, and if caught, you are experience a pain of high penalties and a nasty and real possibility of criminal charges.
The IRS says that these 1040X's 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 DOJ claims that it has also begun prosecution of citizens whose "Quiet Disclosures" were discovered by the Internal revenue service.
There are other problems with "Quiet Disclosures." One massive failing is that a soft disclosure does not address the matter of the taxpayer's non-compliance in FBAR filing; as a willful failure to file an FBAR is a criminal charge. So filing a quiet disclosure does not go far enough to remove any likelihood of criminal investigations. In fact, the amended return might --- well here's the terrific dilemma with this option --- it does nothing about the failure to the FBAR. There are still criminal and civil charges that may be pending for failing to file an FBAR, but simply give the Internal revenue service a roadmap to locate you.
The forth option is a pre-emptive disclosure and subsequent negotiation of the penalties. This is the best option. Even though the time to file under the 2011 initiative has expired, it is not too late. The only deal that passed on August 31, 2011 was the particular standards terms of the 2011 OVDI. It was simply a pre-agreed upon penalty structure. The IRS always welcomes voluntary disclosures.
There are two main requirements. First, the taxpayer can't already be under examination or investigation. And next, the foreign accounts can't be connected to criminal activity - like currency laundering or drug trafficking. Once these qualifications are met, criminal crimes are removed from the continuum of possibilities and the taxpayer's is referred to the civil division for assessment of taxes, interest and penalties. A successful OVDI offers reduced penalties and a promise of absolutely no criminal charges. Although fines and penalties may be noteworthy, they are meaningless compared to an .
If someone is still questioning what the suitable course of action is, it is critical that they only talk to a experienced overseas tax law firm. The attorney-client privilege only applies when speaking to an attorney. The Internal Revenue Service can subpoena nearly anyone else to give evidence against a taxpayer. 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.
The first option is to do nothing except hope and pray. The benefit is that it costs zero to do, and there is certainly a possibility, no matter how minor, that the taxpayer can get away with the crime. The disadvantages are that if caught, the penalties are severe. In both monetary cost and in emotional drain of being charged with a federal crime. Even if found not guilty, a criminal trial is still incredibly costly.
Here's the thing - every global banking and financial organization must be in the US marketplace or it would become such a small time player that the foreign bank's shareholders would revolt and replace management --- immediately. Despite everything you may have heard, the US is still by far the largest economy in the world and every global foreign bank must be on the good side of the Internal Revenue Service - otherwise that foreign bank will be shut out of getting US capital or customers! Part of being on the good side of the IRS is to cough up what the IRS says to disclose. As a result the foreign bank is really at the mercy of the IRS-.meaning so are the banks' account holders. So you see, hiding behind the shadows becomes a more dangerous and dangerous. And once the IRS starts seeking a criminal indictment, there is only one option left-pay outrageous taxes and the highest penalties and face the significant possibility of real jail time.
The second option is to renounce citizenship and depart the country --- as there is no other way to escape the power of the IRS. But be warned --- expatriation only will avoid future tax debts and conformity problems. The only technique to correctly relinquish is to fundamentally come forward about all foreign bank financial records and actually forfeit an expatriation excise (in many ways it was easier to leave Soviet Block country than to leave the USA completely intact with your wealth.)
This third way is to quietly filed amended 1040X's and not mention to the Internal Revenue Service that you are seeking to voluntarily disclose. This is known as a "quiet" or "soft" disclosure. The advantage is that there is little upfront cost to this. But the horrible possibilities are that you may give the IRS a roadmap to charge you criminally, and if caught, you are see high penalties and a possibility of criminal charges.
The Department of Justice states that it has begun prosecutions on people who have attempted soft disclosures. So this option has some serious problems
The "soft" disclosure option is incredibly risky for several reasons. One reason is that a soft disclosure does not address the matter of the taxpayer's non-compliance in FBAR filing; as a willful failure to file an FBAR is a criminal charge. So filing a soft disclosure 't go far enough to remove any possibility of criminal investigations. In fact, the 1040X may --- well here's the problem with this alternative --- the quiet disclosure does nothing concerning 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 Internal revenue service a roadmap to find you.
Option 4: Pre-emptive Disclosure and Negotiation (" Offshore Voluntary Disclosure Initiative") If getting sleep at night and not worrying about going to prison is chief importance, there can be no doubt that this is the best option. Yes, the 2011 initiative expired, but that does not mean a voluntary disclosure can not be filed. The Internal Revenue Service always welcomes offshore disclosures. The only deadline that was missed was the particular terms of the 2011 OVDI which capped certain penalties.
There are two main requirements. First, the taxpayer can't already be under examination or investigation. And next, the foreign financial accounts cannot be connected to any criminal activity - think money laundering or drug trafficking. Once these qualifications are satisfied, criminal indictments are removed from the continuum of possibilities and the case is sent to the regular civil assessment division for assessment of taxes, interest and penalties. A successful OVDI offers reduced penalties and a guarantee of no criminal prosecution. Although fines and penalties may be noteworthy, that's just a bill, they are meaningless compared to an .
If someone is still questioning what the appropriate course of action is, it is imperative that they only talk to a experienced offshore tax lawyer. The attorney-client privilege only applies in communications to an attorney. The Internal Revenue Service can subpoena a CPA or nearly anyone else to give evidence against a taxpayer.
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