Vermonters With Interests In Foreign Accounts—Time To Come In Out Of The Cold

Article written by Ron R. Morgan, Esq.
Posted on Aug 02, 2013

If you or a member of your family has foreign investment accounts, and/or interests in trusts, corporations or other foreign entities that have not been disclosed to the IRS, I strongly suggest you read on, because there is a growing list of reasons to “come clean” now.

  • The IRS is Eventually Going to Find Out About Your Foreign Account.
    • The IRS’ ability to obtain information about previously secret Swiss financial accounts has been well publicized. It now appears that Bank Julius Baer will be the next big Swiss target: http://www.bloomberg.com/news/2011-01-17/wikileaks-to-publish-client-data-from-ex-julius-baer-banker.html. A number of European banks with offshore networks have also sprung leaks, and Wikileaks is actively pursuing information it can publicize about Bank of America, although its content is as yet unknown.
    • In the wake of the UBS settlement, the Commissioner of the IRS has stated that they will continue to aggressively pursue undisclosed offshore accounts: http://online.wsj.com/article/SB10001424052748703628204575619000884254126.html.
    • The U.S. Department of Justice has hired hundreds of new attorneys and assistants in the past two years, in major part to help prosecute offshore tax evasion. Justice Department officials are aware that people have moved assets in Swiss accounts to other jurisdictions such as Hong Kong and Singapore, and those leads are being pursued.
    • As taxpayers continue to provide information to the IRS under its 2009 voluntary disclosure program, the Government is building a huge database of information regarding foreign account holders and the people advising them. See link to “optional letter” showing information requested in connection with voluntary disclosures.
    • Beginning in 2013, payers of US source income to foreign financial institutions will be required to withhold 30% of such payments unless certain reporting requirements are met by the financial institutions. The reporting requirements include providing detailed information about the foreign banks’ US account holders and their account balances. Instead of being cut out of the US banking system, it is very likely that most foreign banks will voluntarily disclose information concerning their US accountholders after 2012.
  • The Penalties for Noncompliance are Steep.
    • Civil penalties for failure to disclose foreign assets and accounts, whether held in trusts, corporations, or other devices, can easily exceed value of offshore accounts. The penalty for willful failure to file the Foreign Based Asset Report (FBAR) is 50% of the highest value of the account each year; FBAR penalties are collectible out of all assets of the taxpayer, not just the assets located abroad. For a detailed list of penalties that may apply.
    • Additional penalties apply in 2011.
      • A penalty of $10,000 to $50,000 for failure to disclose foreign financial assets exceeding $50,000 on schedules required to be attached to form 1040 for the 2011 tax year and after.
      • An Accuracy-Related Penalty of 40% (double the previous rate of 20%) of any underpayment of tax attributable to undisclosed foreign financial assets.
      • A new minimum penalty of $10,000 for each failure of beneficiaries of foreign trusts to satisfy reporting requirements. Note—rent-free use of real estate owned by a foreign trust is now covered.
    • As noted in Item 1 a. above, the Government has been aggressively pursuing criminal indictments against offshore tax evaders who do not come forward voluntarily and will continue to do so. As part of its prosecution policy, it often publicizes the names and financial information on those it prosecutes.
  • Inherited Undisclosed Foreign Assets Are a Poison Pill.
    • Fiduciary and transferee liability laws mean the sins of the parents are visited on the children. If you administer the estate or trust of a parent with undisclosed foreign accounts, you may become personally liable, out of your own assets, for any unpaid liabilities attributable to those accounts, including taxes and penalties. In addition, if you inherit assets that are or were held in an undisclosed foreign account, you may become liable as a transferee for any taxes and penalties attributable to such assets.
    • Since an executor or trustee has no incentive to hide the existence of a foreign account when they may be held personally liable, a parent with interests in such assets would be well advised to clean up the problem while they are alive and the potential for minimizing penalties exists, as opposed to burdening their heirs with an even larger problem.
  • The Price for “Coming Clean” is Rising.
    • Based upon past experience, future IRS amnesty programs will become increasingly onerous.
    • The 2003 Offshore Voluntary Compliance Initiative offered amnesty in exchange for payment of any taxes due, plus interest, and a penalty equal to 20% of the tax underpayment. FBAR penalties and civil fraud penalties were waived.
    • The 2009 Initiative added an FBAR penalty equal to 20% of the highest balance in the account during years newly disclosed (generally, the past 6 years).
    • The IRS has announced that it is considering another Voluntary Compliance Initiative in the near future. Some observers believe it will carry a 25% FBAR penalty.
  • Don’t Wait. If you believe you are not in full compliance with the laws concerning disclosure of foreign accounts, see a competent tax advisor immediately. Don’t wait for the announcement of a new voluntary compliance initiative by the IRS. The term “voluntary” only applies if the IRS has not already received information about you (via “leaks” to the press, disclosures to the IRS by banks or investment advisors, or otherwise). As the IRS’ pool of information inevitably grows, opportunities for voluntary disclosure are going to diminish.

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