Offshore Accounts Subject to New Tax Protocols

For many years, American taxpayers were able to avoid taxes by placing assets in offshore accounts. Rules regarding disclosure were ambiguous and easily circumvented, and enforcement by the IRS was weak. As a result, offshore planning became synonymous with tax-free planning, and most advisors were conditioned to equate offshore with tax avoidance. In fact, U.S. taxpayers are taxed on their worldwide income, from whatever source, and under the new Foreign Account Tax Compliance Act the U.S. has imposed reporting obligations on foreign financial institutions that have accounts for U.S. taxpayers.

The penalties for not paying are severe. For example, the maximum civil penalty for failing to file can be up to 50 percent of the account value, and criminal penalties can be up to $500,000 and 10 years in prison. Each form and corresponding failure to file has its own set of  draconian penalties, and they can be stacked on one another. The longer one waits to come clean, the greater the penalties.

Amnesty is possible. Due to the success of the offshore amnesty programs of 2010 and 2011, the IRS launched its third amnesty program in 2012, and it is still available in 2013. Provided that the taxpayer is not under investigation or audit already, the taxpayer may come forward and avoid criminal prosecution.

Given the opportunities the IRS has provided for U.S. taxpayers to gain amnesty, it is becoming less tolerant and forgiving of those who don’t.