The Four Things You Want To Know About Offshore Voluntary

The Four Things You Want To Know About Offshore Voluntary Disclosure Initiative

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. With that in mind, here are the four options currently available to those wondering what to do.

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 likelihood of greater than zero, no matter how slight, that the taxpayer can get away with the crime. The downside that is if learned, 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 hidden accounts gets more and more remote. 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 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 American citizens but who opened their accounts with foreign passports. The IRS 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.

The next option is to renounce citizenship and leave the country --- as there is no other way to escape the power of the IRS. But be warned --- this only works to avoid upcoming tax debts and submission troubles. The only way to correctly abandon is to essentially come clean about all overseas foreign bank accounts and actually pay an expatriation tax (in many ways it was easier to leave Soviet Block country than to leave the USA completely intact with your wealth.)

Option 3: Soft (or quiet) disclosure. An option that some taxpayers attempted is to file amended tax forms 1040X's and mail them to the IRS just like "regular" 1040X's, pay the taxes, and hope the Internal Revenue Service won't figure out what was going on. Doesn't this seems like a fool-proof game-plan? Perhaps one could avoid all those excessive penalties of the OVDI programs?

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 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 taxpayers whose "Quiet Disclosures" were discovered by the Internal revenue service.

The "soft" disclosure option is incredibly risky for several reasons. One reason 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 quiet disclosure does not go far enough to eliminate any possibility of criminal investigations. In fact, the amended return might --- well here's the massive problem with this alternative --- it 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 Internal revenue service a roadmap to find you.

The forth option is a pre-emptive disclosure and subsequent negotiation of the penalties. This is the optimal solution. Even though the time to disclosure under the 2011 OVDI has passed, 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 Internal revenue service always welcomes voluntary disclosures.

There are two main requirements. First, the taxpayer can't already be under audit or investigation. And second, the foreign assets can't be connected to any criminal activity - think money laundering or drug trafficking. Once these prerequisites are met, any criminal charges are removed from the continuum of possibilities and the case is sent to the civil division for assessment of taxes, interest and penalties. A voluntary disclosure offers reduced penalties and a guarantee of absolutely no criminal charges. Even though fines and penalties may be considerable, that's just a bill, they are insignificant compared to an .

If someone is still wondering what the appropriate course of action is, it is critical that they only talk to a qualified overseas tax attorney. The attorney-client privilege only applies in communications to an lawyer. The IRS can subpoena a CPA or nearly anyone else to give evidence against a taxpayer.

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