Do You Still Have an Undisclosed Foreign Account?

If you are the owner of a foreign account or other foreign financial asset that has not been properly reported to the IRS, what are your options now?

Option One: come forward now. The IRS Offshore Voluntary Disclosure Program (OVDP) still remains open. Criminal prosecution is usually avoided if you come forward before you are caught. In addition, the penalties are much higher outside the OVDP in the event you are caught by the IRS. You may be caught because of FATCA, an investigation, an audit, an information request to a foreign bank, a subpoena upon a foreign bank, or another person’s disclosure of account info. Thus, if you have not entered the Offshore Voluntary Disclosure Program, you may still come forward; you will pay penalties, but the penalties will still be significantly lower than if you don’t come forward and the IRS catches you. In that case, jail time for criminal tax fraud is also a frightening possibility. In some cases, depending on the background facts, the penalties for an undisclosed foreign account may be as little as 5 percent or even zero, provided that the IRS doesn’t already know about your offshore assets.

Option Two: convert your account to a tax-compliant structure. We have long counseled the use of tax-compliant strategies to minimize U.S. taxation. We also advise clients on the legitimization of non-compliant offshore assets. We counsel clients regarding the proper steps to transform a non-compliant offshore account into one that complies with current U.S. laws. Although we cannot erase a non-compliant past, we can counsel on full compliance going forward. Such steps may significantly reduce the risk of detection and prosecution.

Option Three: do nothing and hope that the IRS does not discover your foreign account. You would be relying on past promises of banking secrecy as a means of future protection. However, as the events of recent years have proven, foreign banking secrecy no longer exists. Moreover, FATCA is now in effect, whereby virtually all foreign banks report bank data to the IRS. In light of this new world order, sooner or later the IRS will likely find your foreign account and then it will be too late. Even if you somehow remain “under the radar”, any attempts to access the foreign funds could raise “red flags” and thus your foreign assets are essentially inaccessible. Clearly, we do not recommend this “ostrich” strategy.

We do recognize that making a formal voluntary disclosure would include paying a penalty, and we recognize that this penalty, although much less than civil and criminal tax fraud penalties, may still be quite onerous. The question thus becomes: are alternatives available to come into IRS compliance, and, at the same time, to also avoid the OVDP penalty?

We do not believe that everybody with foreign assets should automatically rush to enter the OVDP and pay the high penalties. The OVDP, with its “one size fits all” penalty, is not always the best, or only, course of action in all offshore cases. In addition, if your background facts meet certain requirements, the “Streamlined” voluntary disclosure procedures may be appropriate, and would offer significantly lower penalties.

Every client has different facts. We must address the particular facts of the client’s foreign assets, the past non-compliance, the client’s reported income, the amount of unreported foreign income and the tax loss to the IRS. Not everyone with foreign assets should avoid the OVDP, but not everyone with foreign assets should enter the OVDP. We can examine the facts, assess the risks, and discuss alternative strategies that may reduce or even entirely eliminate IRS penalties.