International tax issues are coming in the door of our Atlanta CPA firm with greater frequency. In part, this is expected in an ever expanding global marketplace. Of greater concern, however, is the “perfect storm” of enhanced IRS international tax enforcement in the age of the internet. Easily available data and information sharing between countries and foreign banks makes it very difficult for US taxpayers to hide offshore activity, including the existence of foreign bank accounts.
Taxpayers have been required for decades to report foreign transactions and foreign bank account activity to the IRS. The purpose of this reporting is to identify transactions that may be connected to money laundering, tax evasion and other criminal activities. The IRS uses this information to ensure that taxpayers are paying tax on all their worldwide earnings, including those housed in foreign banks.
In the early 2000’s the IRS and the Department of Justice began to go after Swiss banks. As part of this effort, the IRS issued summonses to force about a dozen Swiss banks to provide financial information about US taxpayers. Faced with the threat of enormous penalties, the Swiss banks entered into agreements with the US government to provide the names of thousands of US taxpayers with undisclosed foreign bank accounts.
The IRS used the threat of disclosure by Swiss banks to pressure taxpayers to voluntarily disclose their foreign bank activity. This was done through the newly created Offshore Voluntary Disclosure Program. Through this program the IRS offered criminal amnesty, reduced penalties and the opportunity to get into the good graces of the IRS without prosecution. Between this and the later Streamlined Compliance Procedure, more than 100,000 taxpayers with non-willful violations came forward and volunteered information about their foreign bank activity to the IRS.
Participants in these programs would submit a reasonable cause statement as to why they had undisclosed foreign bank accounts. In turn, the IRS would not automatically impose penalties.
A few years ago the IRS formally closed the Offshore Voluntary Disclosure Program. Nevertheless, procedures still exist outside of this program to voluntarily disclose information about foreign bank accounts and other foreign transactions to the IRS in exchange for favorable terms. These procedures usually result in a hefty penalty, with the opportunity to argue for a reasonable cause exemption at IRS Appeals.
One of the issues which comes up in practice is the determination of whether or not the taxpayer willfully withheld information about foreign accounts from the IRS. This point will be critical for the taxpayer’s success at Appeals. However, the facts are often ambiguous in these cases and the result is difficult to predict.
Furthermore, voluntary disclosure is not allowed if the government already knows that the taxpayer did not report this information on tax returns. In theory, a “pre-clearance procedure” does exist, but the process is inefficient and requires disclosure of foreign banking information that the taxpayer may prefer to keep confidential.
As a result, taxpayers often wonder if the program is worth the potential risk of audit and penalties.
Commentators argue that the risk of punishment is a roadblock to voluntary disclosure, which ultimately hurts the tax collection activities of the IRS.
In summary, the choices that taxpayers face under current IRS procedures for voluntary disclosure of foreign bank information are:
- File delinquent foreign bank information forms with the IRS. This will automatically result in penalties, which the taxpayer may take to IRS Appeals and argue for a reasonable cause exemption.
- Start filing foreign bank activity forms going forward and hope that the IRS does not pick up on the missing forms from prior years.
- Do nothing and argue for a reasonable cause exemption if the issue ever comes up in an audit. Aside from the ethical concerns of such a choice, the taxpayer would be left to worry late at night about the risk of getting caught.
These choices will be of concern to anyone with bank accounts in foreign countries that have not been disclosed to the IRS. This includes foreign bank accounts of US residents or businesses, bank accounts of individuals going through the immigration process, and inherited assets of US taxpayers kept in foreign banks.
If you or someone you know has a tax issue relating to foreign bank accounts, international tax, or any other tax or accounting matter, please contact us at (678) 235-5460. You can also email us at Gary.Massey@masseyandcompanyCPA.com.
Massey and Company CPA is a boutique tax and accounting firm serving individuals and small businesses in Atlanta, Chicago and throughout the country. Our services include tax return preparation, tax planning for businesses and individuals, IRS tax problem resolution, IRS audits, sales tax, and small business accounting and bookkeeping.