The IRS has announced that if you still have a secret offshore account that you have until Aug. 31 to come clean and avoid criminal prosecution.
With all the new U.S. legislation and foreign countries cooperating, it's becoming clear that declaring previously secrete accounts is a good idea.
The United States recently enacted the Foreign Account Tax Compliance Act (FATCA), which forces foreign financial firms to reveal the details on their American clients. So not only does the IRS rule over U.S. taxpayers, but it also effectively rules over foreign financial firms having financial dealings with Americans.
While this legislation does create problems with its discouragement of foreign investors into the U.S., apparently Congress thought that collecting taxes on undisclosed accounts was worth the price. More than likely, this will be another example of the Law of Unintended Consequences being proved true.
In any event, the first Voluntary Disclosure Program which ended on Oct. 15, 2009, brought some 15,000 hidden foreign accounts into the sunlight of taxation, interest and penalties. Since then, about 3000 more taxpayers have come forward. With this new voluntary disclosure program, these taxpayers can pay up on the civil side and avoid criminal prosecution. But paying up isn't coming cheap.
While the new initiative will have a higher penalty structure than the first one, it will have some new features that may be beneficial in some limited factual situations. Basically, it's the tax plus a penalty of 25 percent of the highest aggregate amount in the foreign account.
However, some taxpayers may qualify for a penalty of 5 percent or 12.5 percent. Plus, of course, accuracy related and/or delinquency penalties. Still, it's only money and paying up does allow the unfortunate taxpayer to benefit by avoiding spending time, at the governments expense, at the Graybar Motel.
The first voluntary disclosure program required extensive disclosures not only on the amount in bank account but also information on the network of banks involved, financial advisers, lawyers and other professionals, and other intermediaries who help to facilitate the setting up these accounts. The IRS is "data mining" this information and reportedly there are a lot of investigations which are quite advanced.
With the passage of FATCA, it should be expected that the IRS will be flooded with even more information on foreign accounts. The purpose of FATCA is to force the foreign financial institutions to disclose the identity of American account holders to the U.S. government if the U.S. account holder hadn't already come forward and is tax compliant.
Unfortunately, the FATCA law is extremely complex and its impact on the whole globalized world of non-U.S. financial organizations that interact with each other is, to be kind, unknown. So far, it appears Congress has been successful in getting a lot of previously unknown U.S. taxpayer connected foreign accounts into the U.S. tax system and collecting some tax money. And it also is apparent that Congress has been successful peeving off a great deal of the world's financial organization and, consequently, making the U.S. a less desirable place to do business.
The IRS recognizes that it is perfectly legal for Americans to have foreign financial accounts and dealings.
To its credit, the IRS has once again come up with a civil voluntary disclosure program to allow people to come in from the cold, become tax compliant, and receive amnesty from criminal prosecution.
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