On 3/23/09, the IRS issued three memoranda regarding the voluntary disclosure of offshore accounts with the following key points:
1. The IRS was prioritizing audit examinations and investigations of abusive offshore transactions designed to evade the payment of U.S. taxes;
2. The Criminal Investigation Division (“CID”) of the IRS was made responsible for initially screening any taxpayer’s amended return to determine the actual eligibility of the taxpayer to make a voluntary disclosure of this income to the IRS;
3. The amended returns with offshore account disclosures were to be processed for civil penalties through the Philadelphia Offshore Identification Unit;
4. The IRS/Philadelphia office would seek to execute taxpayer agreements to resolve the offshore issues, including: the assessment of all taxes and interest for six years, an accuracy or delinquency penalty for all years, and penalties “equal to 20% of the amount in foreign bank accounts/entities in the year with the highest aggregate account/asset value;
5. Taxpayers had until 10/15/09 to make their voluntary disclosures.
In 2010, the Hiring Incentives to Restore Employment Act of 2010 (“HIRE Act”) (P.L. No. 111-147) was enacted with provisions to prevent U.S. taxpayers from avoiding federal taxes by hiding money in offshore accounts.
Under the HIRE Act, foreign financial institutions will have a 30% tax withheld on their U.S. investments if they refuse U.S. account holder information:
2. Social Security Number, and
3. Account Information.
U.S. taxpayers will have to disclose foreign accounts on their U.S. tax returns (Form 1040) by attaching Form 8938. The minimum penalty for non-disclosure is $10,000 increased by $10,000 every 30 days of non-disclosure, up to $50,000.
The understatement of tax penalty was increased from 20% to 40% (IRC Sec. 6662(j). The statute of limitations was lengthened from three years to six years (IRC Sec. 6501(e)).
Civil penalties may include:
1. Failure to file;
2. Failure to pay tax;
3. Accuracy-related penalty;
4. Civil fraud;
5. FBAR penalty; and
6. Failure to file information returns.
Criminal penalties may include:
1. Tax evasion;
2. Willful failure to file return;
3. Failure to supply information or pay tax;
4. False returns; and
5. False documents.
On February 8, 2011 the IRS announced a second Offshore Voluntary Disclosure initiative for U.S. taxpayers with previously undisclosed offshore income, through 8/31/11, with higher penalties.
In July 2012, the IRS announced their third Offshore Voluntary Disclosure program (with no time deadline) with higher penalties.