Among the terms of the 2011 Offshore Voluntary Disclosure Initiative, McKenzie says participants with at least $75,000 in unreported offshore money pay a penalty of up to 25% of the highest aggregate balance over the past eight years in a foreign bank account or entity. For accounts less than $75,000, the penalty is 12.5% of the highest balance over the same time period. These are stiffer terms than in 2009, and failure to comply could mean criminal prosecution.
The goal, according to Lawrence Brown, a tax litigation attorney in Fort Worth, Texas, is to encourage taxpayers to come forward but not reward those who sat out the prior disclosure program. He says the IRS typically won't prosecute if a person voluntarily discloses their offshore accounts.
The IRS has beefed up efforts to nab undisclosed offshore accounts by hiring more staff for international tax investigations and getting more cooperation from foreign banks that might've helped U.S. citizens hide assets. "There's been a great deal of pressure put on tax haven countries," McÂKenzie says, noting that Switzerland and the Cayman Islands are among the countries being more cooperative with the IRS.
"It's still legal for Americans to put money into foreign accounts," McKenzie says, adding that financial advisors have an obligation to remind clients with overseas funds that they have to disclose and pay tax on that income. That includes filing a Foreign Bank and Financial Account Report, or FBAR, for overseas accounts worth more than $10,000 by June 30. Penalties for willful failure to file an FBAR can be the greater of a $100,000 fine or 50% of the total foreign account. There may be other forms to file, and accompanying penalties if they're not.
If the client willfully failed to report the income and the IRS nabs them, the advisor who didn't put his legally defensible advice in writing could get dragged into the case and potentially-depending on the outcome of the case-stand accused of aiding and abetting tax fraud. The penalties include jail time and heavy fines. McKenzie says the IRS has been investigating advisors all over the country since the prior voluntary disclosure program in 2009.