If you are an American taxpayer with an offshore 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 notice the foreign bank account. Perhaps your account is at a bank that you think to be "off the radar" or is in a quiet jurisdiction, 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 tools than it ever did previously to find secret accounts.
This is an important caveat. The chances are that the Internal Revenue Service does not discover undisclosed accounts gets smaller and smaller. Why? Because in order to compete for US 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 IRS as well. So if the IRS wants information on US holders of foreign accounts, the IRS will get that information. The IRS will also run names of other people it suspects of being US citizens but who opened their accounts with foreign passports. The Internal Revenue Service has more power and intelligence that it ever had before. The IRS has the manpower and field agents in every major city around the globe.
Option 2: Renounce citizenship; Leave the country. There is only way to escape the jurisdiction of the Internal Revenue Service taxing authority. That is, to renounce one's citizenship and no longer be a US citizen. The process is not as easy as you may think. Furthermore, a requirement of proper 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. Expatriation may make sense to avoid future tax liabilities , but you have to disclose the existence of secret accounts first.
Option 3: Soft (or quiet) disclosure. An option that some citizens attempted is to file amended tax forms 1040X's and mail them to the IRS just think "regular" 1040X's, pay the taxes, and hope the Internal Revenue Service won't figure out what was going on. Sounds like a good strategy, right? Perhaps one could avoid all those excessive penalties of the OVDI programs?
There may be serious problems with this alternative. One major drawback is that the Department of Justice states that it has begun criminal proceeding against citizens who attempted to utilize the "soft" disclosure process.
The "soft" disclosure option is incredibly risky for several reasons. One massive failing is that they do 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 simply filing a quiet disclosure does not go far enough to eliminate any possibility of criminal investigations. In fact, the amended return may --- well here's the terrific dilemma with this alternative --- the soft disclosure does nothing about the failure to FBAR forms. There are still criminal and civil investigations that may be pending for failing to file an FBAR, but simply give the IRS a very handy to find 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 disclosure under the 2011 initiative has expired, it is not too late. The only thing that expired on August 31, 2011 was the particular standards terms of the 2011 disclosure. It was simply a pre-agreed upon penalty arrangement. The Internal revenue service always welcomes voluntary disclosures.
There are only 2 requirements. Initially, the taxpayer can not be under audit. 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 suitable course of action is, it is imperative that they only speak to a qualified offshore tax attorney. The attorney-client privilege only applies when speaking to an lawyer. The Internal Revenue Service can subpoena nearly anyone else to testify against a taxpayer.
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