50% Penalty for Taxpayers Who Hold Accounts at a Bank Under Investigation

The Internal Revenue Service announced last week changes to its programs for taxpayers with undeclared offshore accounts, the latest step in a five-year campaign against such accounts held by U.S. taxpayers. The modifications greatly eased penalties for people who were unaware of tax and disclosure requirements.

At the same time, the IRS sharply increased the penalty for people in its amnesty program who intended to cheat. For taxpayers who enter the OVDP program after it becomes public that a bank where the taxpayer holds an account is under investigation by the IRS or Department of Justice, the offshore penalty is increased from 27.5% to 50% of the highest balance of the taxpayer’s foreign accounts/assets during the preceding 8 years.  Although the list may grow as FATCA is implemented, the current list of those banks include:

• HSBC India

•      UBS AG

•      Credit Suisse AG, Credit Suisse Fides, and Clariden Leu Ltd.

•      Wegelin & Co.

•      Liechtensteinische Landesbank AG

•      Zurcher Kantonalbank

•      Swisspartners

•      CIBC FirstCaribbean International Bank Limited, its predecessors, subsidiaries, and affiliates

•      Stanford International Bank, Ltd., Stanford Group Company, and Stanford Trust Company, Ltd.

•      The Bank of N.T. Butterfield & Son Limited (also known as Butterfield Bank and Bank of Butterfield)

The IRS released the above list with 10 banks currently under investigation whose clients could be subject to the 50% penalty. It also disclosed that the higher penalty would take effect on August 4.

The IRS is quietly applying pressure to noncompliant taxpayers to come out of the dark and disclose their accounts or face extremely high penalties.

The list does not include all of the the names of other financial institutions that have surfaced in criminal cases involving individuals with offshore accounts. An IRS spokesman says that for now the list is complete, and that it will be “kept up to date.”  The IRS can add names to the list and probably will add banks after FATCA implementation over the next several months.

The IRS announcement and program changes seem to make it easier for some taxpayers and more difficult for others. Detailed analysis is required to ascertain the risk/reward for each taxpayer.  Regardless, as FATCA continues to go fully online (and the bank list grows), the cost and risk of doing nothing seems to have gone up significantly. In summary, taxpayers with undisclosed offshore accounts  should fully explore some form of voluntary disclosure before it is too late and much more costly.

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