“After 2013, when FATCA takes effect, the foreign banking community will be required to tell the IRS about individuals with undeclared offshore bank accounts,” explains David Treitel, tax director at US Tax & Financial Services. He is referring to the Foreign Account Tax Compliance Act, which will oblige non-American financial services institutions to report to the IRS on their American account holders.
“The over-arching message from the IRS is that if you don’t come forward now, later we could send you to jail, or submit you to other extremely bad penalties,” Treitel adds.
As reported, the new amnesty programme, which is being called the 2011 Offshore Voluntary Disclosure Initiative, or OVDI, requires taxpayers with undeclared assets in offshore accounts to come forward by 31 Aug. Those who do will no longer be at risk of being pursued by the IRS for their unpaid taxes, with the threat of criminal punishment; but they will have to pay the taxes and interest they owe, dating back to 2003, as well as a 25% penalty, which would be based on the maximum amount they held in these undeclared accounts at any point during the 2003 – 2010 period.
A 12.5% penalty is available for those with accounts of less than $75,000 in the aggregate.
The scheme follows an earlier disclosure initiative, which ended in October 2009, and which was less onerous. It comes as the US continues to make headlines with its pursuit of Americans it believes are hiding wealth offshore. Last month, for example, an Indian living in the American state of New Jersey was indicted for conspiring to hide money from the IRS in offshore accounts held in India and the British Virgin Islands.
Such cases, as well as the the proliferation of whistleblowing in the wake of WikiLeaks, growing numbers of tax information exchange agreements and the extensive information-gathering powers granted to the IRS by FATCA, "mean the authorities have more power than ever to ferret out non-compliant taxpayers", notes Jay Krause, of Withers, the law firm.
"US taxpayers with undisclosed financial interests who do not come forward could face severe financial penalties and even prison," Krause says. "These threats are no longer empty."
One element of the new OVDI that is different from IRS's 2009 the amnesty scheme is a provision for so-called “accidental Americans”. These are individuals who became American under unconventional circumstances, such as having been born in the US to non-American parents and who were subsequently raised in another country, unaware in many cases that they even are US citizens, and thus obliged to report to the IRS each year for their entire adult lives.
Under this scheme, such individuals – who some believe account for a large percentage of the estimated 1 million or more American expats who do not file Foreign Bank and Financial Account reports annually that authorities think ought to – may qualify for a 5% ‘in lieu of’ penalty rather than being hit with the full 25%.
Five percent may be much less than 25%, but as Krause notes, it is still likely to come as a major shock to many people, who were not even aware that they were Americans, that they owe the IRS a twentieth of their assets.
"There are thought to be thousands of these people in the UK and across the globe," says Krause.
"Most are under the mistaken impression that not holding a US passport means that they are not US citizens. Unfortunately that is not the case."
Adds Paul Hocking, chairman of Frank Hirth, a tax firm specialising in looking after Americans and others with US tax issues: "The 5% penalty for accidental Americans is so narrowly drawn it will only help a tiny handful of [them], as it expressely excludes those people who 'knew' they were a US person -- [such as because they hold] a US passport -- but didn't understand they had a tax filing requirement. This is a large proportion of the non-filers we see, and the penalties for these individuals can be very high."
"For someone who knew they were American [but] didn't understand they had to report their income, to face a minimum of $10,000 per bank account per year penalty is too harsh, let alone someone who falls foul of the asset-based penalties, which can be as high as 25% of the value."
Harsher than 2009 amnesty
Another difference between the new amnesty programme and the previous one is that it "does not let you come forward and pay the statutory penalty, if that happened to be lower than the percentage,” adds Treitel, whose London-based company has branch offices in Zurich and Geneva.
“This time, you are going to pay the 25% of assets [in the form of a penalty charge], come what may, even if the penalties under law would be less than that. So it’s a very, very hard penalty.”
Another feature of the current amnesty is that those individuals who have already filed ‘quietly' can take advantage of the new program to protect against the possibility of higher penalties and criminal prosecution, the IRS said.
‘Quiet filing’ is when individuals send in forms that include the back tax they owe without making any statement, and hope the authorities will be content enough with the money and their coming in from the cold not to pursue them. This is understood to be one of the most common ways people with unpaid tax obligations to the US government rectify their situation. Frank Hirth's Hocking thinks the IRS ought to be relax its official stance against such disclosures, and allow its agents the flexibility to allow them, "so the penalties can be waived when there is no evidence of criminal or willful behviour by the taxpayer".
IRS Commissioner: ‘Tough, fair’
In a statement on the IRS’s website, IRS commissioner Douglas Shulman said the OVDI "gives those hiding money in foreign accounts a tough, fair way to resolve their tax problems once and for all. And it gives people a chance to come in before we find them."
Noting that the IRS’s goal is to “get people back into the US tax system”, Shulman warned that it currently has an undisclosed number of cases and banks “under review”.
“The situation will just get worse in the months ahead for thos hiding assets and income offshore,” he said. “This new disclosure initiative is the last, best chance for people to get back into the system.”