And the Internal Revenue Service demands to know where all the citizens foreign accounts are located --- it is a crime to keep these foreign bank account secret if they are over ,000.00 in value. For those taxpayers in non-compliance, the IRS ran two offshore voluntary disclosure initiatives (OVDI). The last one passed on August 31, 2011. For those taxpayers thinking what to do, this article talks about their 4 remaining options.
Option One: Do nothing. You could do nothing and hope that the Internal Revenue Service does not find out the foreign bank account. Perhaps your foreign bank account is at a bank that you think to be "off the radar" or is in a quiet country, or under a friend's name, or opened with a non-American passport. Well, it used to be that a foreign bank account's actual owner could be kept anonymous. However, now, the IRS has vastly many more weapon at its disposal than it did previously to find undisclosed accounts.
This is an fundamental disadvantage. The chances are that the IRS does not discover hidden accounts gets smaller and smaller. Why? Because in order to compete for US customer and capital, foreign banks are coerced into complying with the IRS. That's right --- foreign banks take their marking orders from the IRS as well. So if the Internal Revenue Service wants information on US holders of foreign accounts, the IRS will get that information. The IRS will also run names of other individuals it suspects of being American citizens but who opened their accounts with foreign passports. The IRS has more power and intelligence that it ever had before. The IRS has the manpower and field agents in every major city around the globe.
Option 2: Renounce citizenship; Leave the country. There is only way to escape the jurisdiction of the Internal Revenue Service taxing authority. That is, to renounce one's citizenship and no longer be a US citizen. The process is not as easy as you may think. Additionally, a requirement of proper expatriation is that a citizen has to be in compliance with all tax laws and pay an expatriation tax in order to make it official. If you fail to expatriate properly, you would still be subject to the jurisdiction of the American, meaning nothing was accomplished and you are still subject to all the requirements of the tax code. Expatriation may make sense to avoid future tax liabilities , but you have to disclose the existence of secret accounts first.
The third option is to simply file amended returns and not explicitedly tell the Internal Revenue Service that you are seeking to come clean. This is known as a "quiet" or "soft" disclosure. The advantage is that there is little upfront cost to this. But the disadvantages are that you may give the Internal Revenue Service a very handy clue to charge you criminally, and if you are caught, you are see high penalties and a nasty and real possibility of criminal charges.
The Internal revenue service says that these 1040X's are "red flags." Even though the tax returns are amended and back taxes paid, the IRS tells says that account holders will still face penalties and criminal charges. In addition to charging and prosecuting people with undeclared foreign income, the Department of Justice claims that it has also begun prosecution of citizens whose "Quiet Disclosures" were discovered by the Internal revenue service.
There are other problems with "Quiet Disclosures." One reason is that a soft disclosure does not remedy the matter of the taxpayer's failure to report the bank account on the FBAR; failing to filing an FBAR can be a criminal charge just by itself. As a result filing a quiet disclosure 't go far enough to remove any likelihood of criminal charges. In fact, the amended return may --- well here's the massive problem with this option --- the soft disclosure does nothing about the failure to FBAR forms. There are still criminal and civil charges that may be pending for failing to file an FBAR, but simply give the Internal revenue service a very handy to locate you.
The forth option is a pre-emptive disclosure and subsequent negotiation of the penalties. If enjoying the rest of your life is chief importance, there can be no question that this is the best option. Yes, the 2011 initiative expired, but that does not mean a voluntary disclosure can not be filed. The IRS always welcomes offshore disclosures. The only deadline that was missed was the particular stipulations of the 2011 OVDI which capped certain penalties.
There are only 2 requirements. Initially, the taxpayer can not be under examination. In addition, the source of the money in the foreign bank accounts can not be from an illegal source. Like drug trafficking or money laundering.
Such pre-emptive off-shore disclosures and negotiations must be handled by a qualified Offshore tax attorneys, skilled in foreign compliance and delicate Internal Revenue Service negotiations.