Tax Law Center Blog

The deadline to enter a complete submission into the 2011 Offshore Voluntary Disclosure Initiative (OVDI) is August 31, 2011, only one month remains and time is running out.

The OVDI provides an opportunity for taxpayers with undisclosed offshore accounts to benefit from structured penalties without criminal exposure but only if the taxpayer comes forward before the deadline.

The United States is the only country that requires its citizens to file a tax return and report their worldwide income, no matter where in the world they might live or how many other citizenships they might hold. While openly confessing past tax sins is a scary proposition for some, the IRS’ Offshore Voluntary Disclosure Initiative that gives filers until Aug. 31 to clear up back taxes is expected to bring many out of the woodwork.

Recently, the U.S. Department of Justice opened a formal investigation into the banking practices of another Swiss bank, Credit Suisse. Based on the government’s investigation into Credit Suisse, many believe the bank may have a larger problem than UBS did two years ago. On another front, HSBC India has taken action to limit a continued investigation as well. Recently, HSBC India has informed all their U.S. clients that they will no longer be able to maintain any form of investment relations and will be transferring them to the HSBC USA branch.

Parag Patel of Patel Law Offices, a law firm that represents many taxpayers throughout the U.S. and around the world with many undisclosed offshore accounts states, “The U.S. government is taking quick action to bring taxpayers into compliance by means of opening investigations into offshore banks suspected of aiding in tax evasion and it is believed the U.S. government will eventually obtain the names of those taxpayers with undisclosed offshore accounts.” Patel continues, “U.S. taxpayers with undisclosed offshore accounts should come forward through the 2011 IRS Amnesty Program while there is still time, in order to limit substantial civil and criminal liabilities.”

“Everything we are seeing from the IRS indicates that this focus on offshore disclosure and compliance is only gathering momentum,” says Mr. Patel, whose practice concentrates on cross-border tax and estate planning solutions. Tax haven abuse, whether at the individual or corporate level, is a popular issue domestically and an easy sell politically.

The general 2011 OVDI terms include: a 25 percent maximum penalty on the taxpayers’ undisclosed offshore accounts with the highest aggregate account balance over an eight year period, 2003 through 2010; participants must pay back taxes and interest for up to eight years as well as accuracy related and/or delinquency penalties; and participants must file all original and amended tax returns and include payments for taxes, interest and accuracy related penalties.

Amending tax returns does not necessarily mean that you owe money –you can generally claim a foreign tax credit for the foreign tax paid to be applied against U.S. taxes owing –but the obligation is that annual returns must be filed. The penalties for not filing returns can be harsh. For example, under the general rules, civil penalties for “willful” failure to file an FBAR can be as high as $100,000 or 50% of the account balance for each violation, whichever is greater. It could also result in criminal penalties of up to $500,000 and/ or a prison term of up to 10 years. Even non-willful violations can trigger penalties of $10,000 per account per year. OVDI participants will also avoid potential criminal prosecution.

“The magnitude of the penalty that may be imposed seems, for many taxpayers, to be totally out of proportion to the severity of their violation –essentially the failure to file an administrative form,” says Mr. Patel.

Starting in 2014, the U.S. Foreign Account Tax Compliance Act (FATCA) will require Canadian financial institutions to disclose information about U.S. citizens who hold Canadian financial accounts or risk punitive withholding taxes of 30% on all payments out of the U.S. “The fact that some global financial institutions are even contemplating implementing the FATCA requirements suggests that the U.S. still has the clout to essentially strong arm foreign jurisdictions into compliance with its anti-abuse initiatives,” Mr. Patel says. “I think it’s clear that we are looking at a paradigm shift when we see a bank secrecy jurisdiction such as Switzerland consenting to hand over thousands of names and disclose account information to the United States.”

Mr. Patel encourages all U.S. taxpayers with undisclosed offshore bank accounts to, “contact a tax attorney immediately in order to assess and possibly minimize their civil and criminal exposure by possibly entering into the current IRS Voluntary Disclosure Program.”

BY THE NUMBERS:

$70B Annual revenue loss to the United States resulting from undisclosed offshore assets, as estimated by the IRS.

$780M Fines, penalties, and interest paid to the U.S. by Switzerland’s largest bank after admitting guilt on charges of conspiring to defraud the United States by impeding the IRS.

30% Potential payout under the IRS Whistleblower Program as a percent of the amount collected as a result of your tip.
$206M Amount collected under the IRS Whistleblower Program in 2009.

15,000 taxpayers “volunteered” for the last 2009 Voluntary Disclosure Program.

Patel Law Offices is a law firm dedicated to helping clients resolve complicated tax, criminal tax, and international tax problems. Our firm assists (and defends) clients and their advisors to legally disclose (and legitimize) foreign accounts.