Posts Tagged ‘Offshore bank’

IRS Kicks Off New Offshore Amnesty Program

Monday, February 28th, 2011

Taxpayers with assets hidden in offshore accounts will get a second chance to voluntarily declare their assets to the IRS in return for reduced penalties under the new Offshore Voluntary Disclosure Initiative (“OVDI”).

This newest offshore amnesty program offers a reduced, 25% penalty which will be calculated based on the highest aggregate amount in the taxpayer’s offshore account between 2003 and 2010. In addition to penalties, program participants will be required to pay eight years of back taxes plus interest, accuracy related penalties, and delinquency penalties.  Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

For previous coverage of offshore issues in Advisor’s Journal, see IRS Planning New Voluntary Disclosure Program for Offshore Assets (CC 10-118), Offshore’s Limited Shelf Life (CC 10-47) & IRS Proposed FATCA Guidance Expands Offshore Compliance Initiatives (CC 10-52)

Voluntary Disclosure for Offshore Accounts is Back

Thursday, February 10th, 2011

Why is this Topic Important to Wealth Managers? Discusses voluntary disclosure program available to clients with offshore accounts.

The Internal Revenue Service announced earlier this week a special voluntary disclosure initiative (the second one of its kind in the past few years).  The Internal Revenue Service states the program is designed to bring offshore money back into the U.S. tax system and assist individuals that may have undisclosed income from hidden offshore accounts to pay taxes owed.  The new voluntary disclosure initiative will be available through Aug. 31, 2011.

The IRS decision to open a second special disclosure initiative follows continuing interest from taxpayers with foreign accounts.  According to the IRS, the first special voluntary disclosure program finished with 15,000 voluntary disclosures on Oct. 15, 2009.  Since that time, the Service notes, more than 3,000 taxpayers have come forward to the IRS with bank accounts from around the world.

The new initiative is being called the 2011 Offshore Voluntary Disclosure Initiative, which includes several changes from the 2009 Offshore Voluntary Disclosure Program.  The overall penalty structure for 2011 is higher, meaning that people who did not come in through the 2009 voluntary disclosure program will not be rewarded for waiting.  However, the 2011 initiative does have additional features.

For the 2011 initiative, there is a new penalty framework that requires individuals to pay a penalty of 25 percent of the amount in the foreign bank accounts in the year with the highest aggregate account balance covering the 2003 to 2010 time period.   However, some taxpayers will be eligible for lower 5 or 12.5 percent penalties.  Participants also must pay back-taxes and interest for up to eight years as well as paying accuracy-related and/or delinquency penalties.

Notably, the IRS’s newly created penalty category of 12.5 percent applies to smaller offshore accounts. Individuals whose offshore accounts or assets did not surpass $75,000 in any calendar year covered by the 2011 initiative will qualify for this lower rate.

Taxpayers with undisclosed foreign accounts or entities are encouraged to make a voluntary disclosure because it enables them to become compliant, avoid substantial civil penalties and generally eliminate the risk of criminal prosecution.   Making a voluntary disclosure also provides the opportunity to calculate, with a reasonable degree of certainty, the total cost of resolving all offshore tax issues.

Taxpayers who do not submit a voluntary disclosure run the risk of detection by the IRS and the imposition of substantial penalties, including the fraud penalty and foreign information return penalties, and an increased risk of criminal prosecution.

Under the penalty framework, the values of accounts and other assets are aggregated for each year and the penalty is calculated at 25 percent of the highest year‘s aggregate value during the period covered by the voluntary disclosure.  If the taxpayer has multiple accounts or assets where the highest value of some accounts or assets is in different years, the values of accounts and other assets are aggregated for each year and a single penalty is calculated at 25 percent of the highest year‘s aggregate value.

Example:

Assume the taxpayer has $1,000,000 in a foreign account over the period covered by his voluntary disclosure.  It is assumed for purposes of the example that the $1,000,000 was in his account before 2003 and was not unreported income in 2003.  The account earns 5% each year and no tax is paid from years 2003-2010.

If the taxpayers in the above example were to come forward and their voluntary disclosure is accepted by the IRS, they face this potential scenario:

They would pay $518,000 plus interest. Which includes:

  • Tax of $140,000 (8 years at $17,500 at 35%) plus interest,
  • An accuracy-related penalty of $28,000 (i.e., $140,000 x 20%), and
  • An additional penalty, in lieu of the FBAR and other potential penalties that may apply, of $350,000 (i.e., $1,400,000 x 25%).

If the taxpayers didn’t come forward, when the IRS discovered their offshore activities, they would face up to $4,543,000 in tax, accuracy-related penalty, and FBAR penalty. The taxpayers would also be liable for interest and possibly additional penalties, and an examination could lead to criminal prosecution

Tomorrow’s blogticle will discuss relevant topics to wealth managers in 2011.

We invite your opinions and comments by posting them below, or by calling the Panel of Experts.

IRS Planning New Voluntary Disclosure Program for Offshore Assets

Wednesday, December 22nd, 2010

Taxpayers who want to come clean with the IRS about offshore assets may get a second chance.

Although taxpayers with undisclosed offshore accounts cannot count on getting deals like those offered under previous voluntary disclosure programs, a new program is in the works. A new disclosure regime will also be available to the 3,000 plus taxpayers who came forward after the October 2009 expiration of the previous disclosure program.

The numbers back up the Commissioner’s confidence, with a total of 18,000 taxpayers with undeclared offshore assets coming forward since the earlier disclosure program was launched.  The program enticed taxpayers to reveal themselves by offering significantly reduced penalties to taxpayers who voluntary disclosed previously undisclosed offshore assets.

The new voluntary disclosure program will still offer decreased penalties for those who voluntarily declare their offshore assets to the IRS, but penalties will be stiffer than those offered under the former program.  Read this complete article at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

For previous coverage of FATCA in Advisor’s Journal, see Offshore’s Limited Shelf Life (CC 10-47)and IRS Proposed FATCA Guidance Expands Offshore Compliance Initiatives (CC 10-52).

Foreign Bank and Financial Account (FBAR)

Thursday, November 11th, 2010

Why is this Topic Important to Wealth Managers? Presents information useful to wealth managers who incorporate offshore activities into clients’ personal and business planning. Discusses, specifically, Foreign Bank and Financial Account reporting and compliance requirements.

There is no specific Federal law that prohibits an individual from owning any interest in a financial account in foreign jurisdictions.  “However, because offshore financial accounts can be used to hide criminal proceeds or evade taxes, federal law does require disclosure of such accounts.” [1]

“Congress has directed the Secretary of the Treasury to require residents and citizens of the U.S., or persons in and doing business in the U.S., to maintain records and file reports of transactions and relations with foreign financial agencies.” [2]

Specifically, every “U.S. citizen, resident and businessperson who has a financial interest in, or signatory authority over, one or more bank accounts, securities accounts or other financial accounts in a foreign country”, must “report that relationship to the U.S. Department of the Treasury if the aggregate value of the accounts exceeds $10,000 at any time during the calendar year”, annually through Form TD F 90-22.1. [3]

For each foreign account, the Form TD F 90-22 must include:

  • The name in which the account is maintained;
  • The account number or other account designation;
  • The name and address of the foreign bank or other person with whom the account is maintained;
  • The type of account; and
  • The maximum value of the account during the calendar year. [4]

Recently, the well known UBS situation highlighted the Foreign Bank and Financial Account or FBAR requirements, where U.S. account holders “held in the name of offshore trusts and other sham entities”, funds at the Bank. [5] In what was thought of by many as unprecedented the Swiss Bank agreed “provide the IRS with the identities and account information of certain U.S. clients.” [6] Federal criminal and civil suits soon followed “resulting in a scramble by thousands of holders of offshore accounts to come clean through an IRS partial amnesty program that was available until October 15, 2009.” [7]

“However, the IRS estimates that for every person who files an FBAR, four persons fail to file a required FBAR in any calendar year.” [8]

Nevertheless, any person who willfully violates the FBAR reporting requirements, or any person who willfully causes such a violation, is subject to a civil money penalty in the amount of $100,000 or 50 percent of the balance in the account at the time of the reporting violation, whichever is greater. [9]

Furthermore, any person who willfully violates the FBAR reporting requirements, or any person who willfully causes such a violation, is subject to criminal fine of up to $250,000 and/or imprisonment for up to five years. [10] Moreover, if the “violation occurs while the person is violating another federal law or as part of a pattern of unlawful activity involving in excess of $100,000 in a one-year period, the person is subject to up to a $500,000 fine, up to ten years imprisonment, or both.” [11]

The new reporting requirement discussed yesterday is similar to the information furnished in an FBAR report but is slightly different.  “For example, a beneficiary of a foreign trust who is not within the scope of the FBAR reporting requirements because his or her interest in the trust is less than 50 percent may nonetheless be required to disclose the interest in the trust with his or her tax return if the value of his or her interest in the trust together with the value of other specified foreign financial assets exceeds $50,000.” [12]

Tomorrow’s blogticle will discuss additional international planning considerations.

We invite your questions and comments by posting them below, or by calling the Panel of Experts.


[1] Steven Mark Levy.  Federal Money Laundering Regulation: Banking, Corporate and Securities Compliance (FMNYL) § 10.02. Wolters Kluwer.  2010.

[2] 31 U.S.C. § 5314(a).

[3] 31 U.S.C. §§ 5314(a), 5314(b); 31 C.F.R. § 103.24, 31 C.F.R. § 103.27(c), (d),

[4] 31 C.F.R. § 103.32.

[5] FMNYL § 10.01.  Citing, IRS Chief: Swiss Deal Shows U.S. Resolve. August 19, 2009. National Public Radio.  Interview.  Douglas Shulman IRS Commissioner.

[6] Id.

[7] Id.

[8] Department of the Treasury, Report to Congress in Accordance with § 361(b) of the USA Patriot Act, at 6 (April 26, 2002).

[9] 31 U.S.C. §§ 5321(a)(5)(C)(i).

[10] 31 U.S.C. § 5322(a); 31 C.F.R. § 103.59(b).

[11] FMNYL § 10.09. Citing, 31 U.S.C. § 5322(b); 31 C.F.R. § 103.59(c).

[12] Joint Committee on Taxation, Technical Explanation of the Revenue Provisions Contained in Senate Amendment 3310, the “Hiring Incentives to Restore Employment Act,” under consideration by the Senate (JCX-4-10), Page 60.  February 23, 2010.

Offshore Swiss Bank Accounts and the Potential Penalties and Fines (Though Not Necessarily) For Non-Disclosure

Friday, October 1st, 2010

Why is this Topic Important to Wealth Managers?   Updates wealth managers who may have clients who may or may not have participated in last year’s voluntary disclosure program of offshore accounts.  Provides an initial report of the direction tax payers can expect to see from the government regarding offshore accounts in the future.    

Recently the discussion of Foreign Bank and Financial Accounts (FBAR) has been reinvigorated with a recent federal district court decision regarding civil penalties the government sought to impose for against one taxpayer for willfully failing to “check the box” on Schedule B on Form-1040. [1] 

“The U.S. District Court for the Eastern District of Virginia held that the federal government could not recover civil penalties for…failure to report…interest in two Swiss bank accounts because [the] action was not willful.” [2]  The government accused the taxpayer’s lack of properly filing his Schedule B to intentionally failing to disclose his offshore Swiss bank accounts.  The government contended that the taxpayer was civilly liable for each account separately “of not more than the greater of the amount (not to exceed $100,000) involved in the transaction (if any) or $25,000.” [3]

The court decision favored the taxpayer and although its rule is not binding on other courts, some wealth managers and practitioners feel the case was a small victory for taxpayers who hold offshore account interests in general.  “The case [] presents a middle-of-the-road approach between the government’s position that all unreported Swiss accounts are willful acts and taxpayers’ claims of ignorance of reporting requirements.” [4]  In addition, “the case illustrates the difficulty the government will have in establishing willfulness for the truly draconian FBAR penalty.”

Some other wealth managers feel that the decision changes their client’s position in regards to voluntary disclosure programs similar to the one available through late last year.  “A possible outcome of the decision is that some taxpayers will be encouraged to opt out of the voluntary disclosure initiative and take their chances with the normal FBAR penalty regime.” [5]

At the other end of the spectrum, it was recently reported that one taxpayer agreed to pay fines and penalties in excess of over $20 million.  In 1967 the individual made a “$200,000 deposit into an account with UBS in Vaduz, Liechtenstein, in the name of a Swiss foundation.” By the end of 2007 the account had grown to more than $41 million (or an average growth rate of 14% annually). 

Despite the significant return on assets, partially attributable to tax deferred growth in the foreign jurisdiction, sometime in 2008, the taxpayer voluntarily disclosed his accounts for the first time in over 40 years, sending along with the reporting form a one million dollar payment (which was later found unnecessary as withholding was properly followed at UBS).  The taxpayer claimed to lose half the value of the accounts caused by the financial calamity.  Notwithstanding,  the 84 year-old’s position, his attorney, said his client had to muster up significant personal funds, to pay the fines and penalties, wiping out almost 80% of the client’s net worth. [6]  The report also noted another recent tale of a “California real estate developer [who] paid $52 million in back taxes, fines and civil fraud penalties for hiding more than $200 million offshore.”

So what is required from your client’s with foreign accounts to comply with the FBAR report rules?  We will address this in a future blogticle.

Next week’s blogticles will discuss taxation and national fiscal policy. 

We invite your questions and comments by posting them below, or by calling the Panel of Experts.


[1] 2010 TNT 171-8; Once the taxpayer does agree to the offshore account interest he is required to file form TD F90-22.1. 

[2] 59 Tax Notes International 847.  Sept. 13, 2010.  (Lexis Nexis). 

[3] 31 U.S.C. § 5321.  (2004). 

[4] 59 Tax Notes International 847. 

[5] Id. 

[6] Forbes.  “How A $200,000 UBS Account Grew Into A $21 Million Penalty”.  http://blogs.forbes.com/janetnovack/2010/09/22/how-a-200000-ubs-account-grew-into-a-21-million-penalty/?boxes=Homepagechannels.  September 22, 2010.  Last Accessed September 26, 2010.