The IRS has power 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 Internal Revenue Service about foreign accounts if their value exceeds $10,000.00 by filing an FBAR form every June. For those citizens in non-compliance, the Internal Revenue Service ran two offshore voluntary disclosure initiatives (OVDI). The last one passed on August 31, 2011. For those people thinking what to do, this piece discusses their four remaining options.
The first option is to do nothing except hope and pray. The advantage 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 downside that is if caught, there is an unbelievable emotional strain for anyone who become a criminal defendant. Even if acquitted, the entire process will be the most arduous time of someone's life. Even if found not guilty, a criminal trial is still incredibly costly.
This is an important caveat. The chances are that the IRS does not discover unreported accounts gets smaller and smaller. 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 IRS as well. So if the Internal Revenue Service wants information on American holders of foreign accounts, the Internal Revenue Service will get that information. The Internal Revenue Service will also run names of other people it suspects of being US citizens but who opened their accounts with foreign passports. The IRS has more power and intelligence that it ever had before. The Internal Revenue Service has the manpower and field agents in every major city around the globe.
The second option is to renounce citizenship and depart the country --- as there is no other way to escape the power of the Internal Revenue Service. But be warned --- this only will dodge future tax debts and conformity issues. The only technique to properly abandon is to fundamentally come forward about all offshore bank financial records and actually pay an expatriation excise (many commenters have noted that it was easier to leave cold war USSR with your wealth intact than the modern day USA. .)
The third option is to quietly filed amended 1040X's and not mention to the IRS 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 disadvantages are that you may give the Internal Revenue Service a very handy clue to charge you criminally, and if caught, you are see high penalties and a nasty and real 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 massive failing is that they do not address the problem of the taxpayer's failure to report the bank account on the FBAR; as a willful failure to file an FBAR is a criminal charge. So filing a quiet disclosure does not go far enough to eliminate any possibility of criminal charges. In fact, the 1040X might --- well here's the massive problem with this alternative --- the soft disclosure does nothing about the failure to FBAR forms. There are still criminal and civil charges that may be pending for failing to file an FBAR, but simply give the IRS a very handy to locate 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 question that this alternative is the best option. Yes, the 2011 initiative expired, but that does not mean a voluntary disclosure can not be filed. The IRS always welcomes offshore disclosures. The only deadline that was missed was the particular terms of the 2011 OVDI which capped certain penalties.
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. Think drug trafficking or money laundering.
If someone is still questioning what the appropriate course of action is, it is critical that they only talk to a experienced offshore tax law firm. The attorney-client privilege only applies when speaking to an attorney. The IRS can subpoena a CPA or nearly anyone else to testify against a taxpayer.
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