In the wake of Hurricane Irene, the IRS program allowing taxpayers to voluntarily disclose assets kept in foreign accounts was extended to September 9. The disclosure program penalizes individuals who have kept money hidden from government tax agencies, but does not impose criminal charges.
A less restrictive IRS disclosure program was implemented in 2009, prompting the registration of about 15,000 foreign accounts. The voluntary declarations come with a penalty of 25 percent of the assets, based on the highest total value of the foreign asset in the last eight years.
The financial punishment for hiding offshore accounts can reach 50 percent of the amount if a taxpayer wilfully hides the assets. That was the recent case for a man who concealed $13 million in two Swiss accounts. Failure to report the money to the IRS cost him $6.8 million.
Officials say the taxpayer’s loss could have gone higher. The fine would have been stiffer if the tax agency tacked on a fraud penalty or decided to impose a penalty amounting to 50 percent of the account’s value for every year it went unreported.
The IRS is hoping that taxpayers with foreign accounts realize that, as costly as penalties may be through voluntary disclosure, not coming clean carries even harsher punishments.
Tax and legal experts say that the IRS voluntary program may or may not be the best solution for everyone with an offshore account. The IRS program takes all foreign assets into consideration, not just money. Negotiating a settlement independently of the disclosure program may be advisable.
Under the IRS program, those taxpayers who have accounts containing inheritances are penalized at 5 percent of the total asset value. The penalty rate increases to 25 percent if the account is transferred between banks and is considered active. If the inheritance has not been transferred, participating in the IRS program may be the best option.
Other account holders who transfer foreign money to U.S. accounts are advised to own up to offshore assets. Banks have become more sensitive to imported transfers and file IRS reports when large transactions look suspicious.
Some advise negotiating with the IRS for a better rate than the disclosure program offers. The process can involve a lot of time, effort and expense, but may result in less severe penalties than the IRS program’s guaranteed 25 percent punishment.
Source: The New York Times, “Voluntarily Disclose Your Offshore Accounts, or Else,” Paul Sullivan, Aug. 26, 2011