The issue of having offshore accounts has really hit home for the South Asian community after banks such as HSBC last year sent their India account holders letters warning them of the John Doe subpoena from the United States District Court served on HSBC seeking information with regard to financial accounts of those in the United States with accounts with HSBC India. A wide array of other banks including government run banks of India are cooperating with IRS demands for India account holders’ information. Many South Asians hold foreign bank accounts and have been reluctant to come forward or are simply unaware of the past two OVDI programs launched by the IRS in 2009 and 2011. The OVDI has been so successful that the IRS reports the collection of more than $4.4 billion so far from the two previous international programs. It is crucial that any non-compliant taxpayers take advantage of the third OVDI as there are no guarantees for how long the program will remain open.
The following are important questions and answers pertaining to your participation in the third OVDI:
1. Who really needs to participate in the third OVDI?
United States citizens, permanent residents and immigrants who may fall into a selective category who have not reported their direct or indirect interest in a foreign entity or foreign trust and/or signature authority in a financial account that is maintained with a bank located in a foreign country. This pertains to foreign bank accounts that have existed for the past eight years in which for any year the total value of all foreign accounts exceeded $10,000 at any point during the year. In addition to this, if the taxpayer has not made the appropriate disclosure in the Foreign Bank Account Reporting form (FBAR) to the IRS by June 30th of every year and/or paid taxes to the IRS on any income or interest earned in any offshore accounts and/or entities and trusts, the taxpayer may be a good candidate to participate in the third OVDI.
2. What are the benefits of participating in the third OVDI?
The OVDI encourages taxpayers to come forward rather than risk detection by the IRS. Taxpayers with undisclosed foreign accounts or entities such as trusts, overseas business corporations, or anyone who has a beneficial interest in any such foreign account or entities should make a voluntary disclosure because it enables them to become compliant, avoid substantial civil penalties and mostly eliminate the risk of criminal prosecution.
3. Could my spouse, children, and other relatives also face civil penalties and criminal charges?
As surprised as you may be to read this, your spouse, children or any other person who may be co-owners, beneficiaries, or have any signature authority in any foreign bank account or entity are obligated to the same degree of disclosure as you may be. Many times, these family members or friends are not even aware that they have a beneficial interest in foreign bank account or entity since they are simply not told about their interest yet may still come under the IRS radar and may be subject to the same or similar civil penalties and criminal charges if they do not fully disclose and rectify their past and current tax obligations.
4. What kind of penalties will I face if I do decide to participate in the third OVDI?
The overall penalty structure for the new program is generally the same for 2011. For the new program, the penalty framework requires taxpayers to pay a penalty of 27.5% of the highest total balance in foreign bank accounts/entities or value of foreign assets during the eight full tax years prior to the disclosure. This has increased from the 25% amount in the 2011 program. Some taxpayers may be eligible for 5% or 12.5% penalties depending on their situation and set of circumstances.
5. What consequences could I face if I decide not to participate in the third OVDI and the IRS audits me?
Taxpayers hiding assets offshore who do not come forward run the risk of detection by the IRS and the imposition of substantial penalties of, up to 50% in many cases, including the fraud penalty and foreign information return penalties along with the increased potential for criminal charges. A person convicted of tax evasion is subject to a prison term of up to five years and a fine of up to $250,000. Filing a false return subjects a person to a prison term of up to three years and a fine of up to $250,000. A person who fails to file a tax return is subject to a prison term of up to one year and a fine of up to $100,000. Failing to file an FBAR subjects a person to a prison term of up to ten years and criminal penalties of up to $500,000.
Generally, the civil penalty for willfully failing to file an FBAR can be as high as the greater of $100,000 or 50% of the total balance of the foreign account per violation. Unintentional violations due to reasonable cause determined by the IRS are subject to a $10,000 penalty per violation.
6. What is the difference between the third OVDI and the two programs from 2009 and 2011?
This program is similar to the 2011 program in many ways, but with a few key differences. Unlike last year, there is no set deadline for people to apply. However, the terms of the program could change at any time going forward.
Now is the time to come clean; not when an unplanned audit by the IRS comes knocking at your door. The IRS is providing an opportunity that may not come again and pretty soon there will be no place left to hide illegal foreign assets.
Call Arora Law Firm now to enter the Third OVDI program at (305) 403-8737 so we may help you end your worries of potential civil penalties and/or criminal prosecution relating to your offshore accounts.
Disclaimer: This article is not intended to be legal advice. Legal advice depends on each and every person's particular circumstance. This article is for informational purposes only and must not be used for avoiding any penalties that may be imposed under the Internal Revenue Code. Arora Law Firm and Radhika Arora, Esq. specifically disclaim any responsibility for positions taken by readers in their individual cases or for any misunderstanding on the part of readers of this article.
Copyright 2012 by Arora Law Firm. All Rights Reserved. This material may not be published, broadcast, rewritten or redistributed without prior written consent of Arora Law Firm