So many taxpayers got caught off guard with the recent attention the irs is giving holders of offshore foreign bank accounts. With the off-the-shelf deals previously offered, the terms of the settlement were known and predictable. Now that the and 2020 offshore voluntary disclosure initiatives (OVDI) have ended, the irs has not yet issued a new OVDI, so many non-compliant citizens are wondering if they should come forward and what the cost of coming forward will be. With that in mind, here are the four options currently available to those wondering what to do.
The first option available is to roll the dice and pray for a miracle. The advantage is that it costs zero to do, and there is certainly a likelihood of greater than zero, no matter how minor, that the taxpayer can get away with the crime. The downside that is if learned, there is an extraordinary emotional strain for anyone who become a criminal defendant. Even if acquitted, the entire process will be the most arduous time of someone's life. Even if found not guilty, a criminal trial is still incredibly costly.
Here's the thing - every global banking and financial institution must be in the American marketplace or it would become such a minor league player that the foreign bank's shareholders would revolt. Despite everything you may have heard, the American is still by far the largest economy in the world and every global foreign bank must be on the good side of the Internal Revenue Service - otherwise that foreign bank will be shut out of getting US capital or customers! In order to be on the good side of the irs is to disclose what the IRS says to cough up. As a result the bank is really at the mercy of the Internal Revenue Service....meaning so are the banks' foreign account holders. So you see, hiding behind the shadows becomes a more dangerous and dangerous. And once the IRS starts an investigation, there is only one option left...pay outrageous taxes and the highest penalties and face the significant possibility of real jail time.
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. Also, a requirement of recognizable expatriation is that you have to be in compliance with all tax laws and pay an expatriation tax in order to make it official. If the expatriation is handled improperly, the Internal Revenue Service treats it as a non-event, meaning you are still subject to the jurisdiction of the IRS --- indefinitely . Expatriation may make sense to avoid future tax liabilities , but you have to report the existence of undisclosed accounts first.
Option 3: Soft (or quiet) disclosure. One option is to file amended returns, this time including previously unreported income - simply filing the returns as if it were simply forgotten income. Sounds like a good strategy, right? Perhaps one could avoid all those excessive penalties of the OVDI programs?
There may be serious problems with this alternative. One major drawback is that the Department of Justice states that it has begun criminal proceeding against taxpayers who attempted to utilize the "soft" disclosure process.
The "soft" disclosure option is incredibly risky for several reasons. One reason is that a soft disclosure does not remedy the issue of the taxpayer's failure to report the bank account on the FBAR; as a willful failure to file an FBAR is a criminal charge. So simply filing a soft disclosure 't go far enough to remove any possibility of criminal investigations. In fact, the 1040X might --- well here's the terrific dilemma with this alternative --- the soft disclosure does nothing about the failure to FBAR forms. There are still criminal and civil investigations that may be pending for failing to file an FBAR, but simply give the IRS a very handy to locate you.
Option 4: Pre-emptive Disclosure and Negotiation (" Offshore Voluntary Disclosure Initiative") This is the best option. Even though the time to file under the 2020 initiative has expired, it is not too late. The only deal that expired on August 31, 2020 was the particular standards terms of the 2020 disclosure. The 2020 OVDI was simply a pre-agreed upon penalty structure. The IRS always welcomes voluntary disclosures.
There are only 2 requirements. First, the taxpayer can not be under examination. Also, 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 OVDI attorneys, experienced in foreign compliance and delicate IRS negotiations. Kenneth Gruchot