Clients sometimes ask why they should take advantage of the IRS Offshore Voluntary Disclosure Program. In it’s frequently asked questions regarding offshore financial accounts the IRS provided an example of what could happen to someone with a foreign bank account of $1million in 2003 that earns $50,000 per year who hasn’t filed Foreign Bank Account Reports, TD F 90-22.1 (FBAR). That person could, if they didn’t apply for tax amnesty, could incur taxes, penalties and interest of well in excess of $2.3 million. If the IRS determined that the non-reporting was due to tax fraud, the amount would be much higher. Under the tax amnesty, the amount due would be $386,000 plus interest. Nevertheless some people don’t want to file for tax amnesty. If the IRS example doesn’t convince you here are six more reasons.
1. Avoid Going to Jail
The failure to file an FBAR can result in criminal penalties of five years in jail and a fine of $250,000 or both for each year the FBAR is not filed. It is the policy of the Department of Justice to ask the court to impose actual prison time; probation is very rare in tax cases. If you are a CPA, a lawyer, or a doctor in addition to going to jail you will lose your license to practice so when you get out you will have difficulty finding a job. If you are not yet a citizen of the United States as a convicted felon you could be deported, or your ability to become a citizen could be impacted.
2. It’s Cheaper Than You Think.
The person in the IRS example pays about $386,000 on $ 1,300,000 of income if he participates in the tax amnesty. In the IRS example the first million dollars was earned prior to 2003, as a result that one million dollars is never taxed. Had the amount been properly reported tax of $455,000 would have been paid (assuming a 35% tax rate). If the unreported income prior to 2003 was greater the savings are greater. For example, assume $3,000,000 of unreported income prior to 2003, and the same amount of interest earnings between 2003 and 2008. The amount paid pursuant to the tax amnesty will increase to $786,000. However, had the income been properly reported the tax that should have been paid would have been $1,155,000. Not a bad deal when you think about it.
3. Avoid Committing Perjury in 2010
Every year when you file your income tax return you are required to answer whether or not you have a foreign bank account. If you answer no you have committed the felony of filing a false tax return punishable by 3 years in jail, and a fine of $100,000. Up until now some people could reasonably say that they didn’t understand the requirement, or that their accountant hadn’t asked them about it. When the time comes to file your 2009 tax return in 2010 you can be sure that your accountant will be asking about your offshore accounts. Some accountants may require you to sign a statement that you don’t have a foreign bank account in order to protect themselves. After this year it will be much more difficult to argue that you were ignorant of the law—even if it is true.
Three more reasons tomorrow.