The Tax Prof Blog reports that the Wall Street Journal Tax Report: The Hazards of Offshore-Account Disclosure: Here’s What Taxpayers Need to Consider Before They Confess, by Laura Saunders discusses what taxpayers must know before using the new OVDI procedures.
Taxpayers should think carefully before entering a new Internal Revenue Service program for offshore-account holders whose conduct wasn’t “willful,” experts say.
“The term ‘willful’ has traps for the unwary, and people are falling into them,” says Barbara Kaplan, a criminal tax lawyer at Greenberg Traurig in New York.
On June 18, the IRS announced significant changes to its limited-amnesty programs for U.S. taxpayers holding undeclared offshore accounts in Switzerland and elsewhere. An IRS official said the agency made them in response to criticisms that it didn’t offer an appropriate “path to compliance” for taxpayers who weren’t intentionally hiding money abroad.
These offshore-account holders now can opt for a new “streamlined procedure.” Participants must file three years of back tax returns and six years of Foreign Bank Account Reports, an annual disclosure form required of those with foreign financial accounts totaling more than $10,000. Participants must also sign a statement certifying that their previous mistakes were “due to non-willful conduct.”
Under this new option, there is a 5% penalty on the balance of the undisclosed account for taxpayers living in the U.S.—and none at all for taxpayers living elsewhere.
Taxpayers in the IRS’s Offshore Voluntary Disclosure Program—for those who intentionally hid money abroad—must pay a much higher penalty: 27.5% of the account’s peak balance. Interest, other penalties and advisers’ fees can raise the total cost to about 50% of the account’s value. On Aug. 4, the main penalty will to rise to 50% in some cases.
Experts warn people who are considering opting for the more lenient, streamlined program to be aware of the meaning of “willful” in tax law. Those who sign the statement in error, they say, are at risk of severe penalties and criminal prosecution.