If you’ve been wondering how much success the Internal Revenue Service has been having with its current FBAR enforcement efforts, the news is positive. Since the new targeting effort began six years ago, more than fifty thousand U.S. taxpayers have voluntarily disclosed previously hidden offshore foreign accounts by filing the required Report of Foreign Bank and Financial Account. These taxpayers have been taking advantage of the Offshore Voluntary Disclosure Program put in place as an incentive to those who want to avoid the heavy punitive fines that will be leveled against those the IRS catches on its own.
Keep in mind that the fifty thousand people mentioned above does not include those taxpayers the IRS is still managing to detect. It only includes those who have taken the initiative to come forward before detection. When the IRS discovers an undisclosed account, those fines and other penalties are not waived. And if you’re someone who still thinks that these fines will amount to little more than a slap on the wrist, think again.
When you have an undisclosed foreign account detected by the Internal Revenue Service, you can forget about leniency. Under the current guidelines, all the agency has to do is prove that you failed to disclose the account. Intent doesn’t matter. The source of your income doesn’t matter. The only relevant factor is one that is all too easy to demonstrate: that you never filed the required FBAR. As soon as they prove that, their ability to assess fines kicks in automatically.
These are not small penalties either. The minimum penalty consists of a $100,000 fine. Of course, if you have millions of dollars in your offshore accounts, you may think $100,000 a small price to pay to avoid U.S. taxes. Remember, though, that is the minimum amount. If your account is worth $200,000 or more, then the IRS can seize half of that account! That’s where the real pain comes into play. Penalties are based on the greater of $100,000 or half of each account balance.
The threat of those penalties has been more than sufficient to entice tens of thousands of offshore account holders to come forward, come clean, and pay any lawful taxes they owe. That means that if you are one of those who have yet to come forward, the opportunity to remain hidden is lessening by the day. The fact is that the IRS appears to only be getting started with its detection efforts, and audits of foreign banks and their accounts continue to reveal new undisclosed holdings.
At this point, there is no real choice for anyone who wants to avoid heavy civil penalties and possible criminal prosecution. The IRS has not yet abandoned the “carrot” approach to uncovering these hidden accounts, but it would be foolish to think that amnesty for voluntary disclosure will last forever. Eventually, the IRS will simply cease its forbearance, set aside the “carrot,” and start relying solely on the “stick” approach. And that’s a stick that anyone with sizeable foreign account assets should definitely strive to avoid.