Taxpayers who have not accurately reported and paid taxes on international business structures, foreign financial accounts, holdings and properties are at greater risk than ever of fines and prosecution. For U.S. taxpayers living or doing business abroad, Uncle Sam can be the shadowy figure of nightmares, lurking behind doors, ready to pounce, potentially subjecting them to criminal prosecution for not abiding to the foreign tax rules.
At stake for the federal government is an estimated $345 billion in tax revenues lost each year as a result of offshore taxes (foreign tax) from hidden or unreported accounts held by U.S. taxpayers or foreign entities they control. Each year, the IRS attempts to close the gap further, increasing numbers of agents and funding for the effort. However, in March 2010, President Obama signed what is arguably the toughest law yet — the Foreign Account Tax Compliance Act (FATCA) provisions included in the Hiring Incentives to Restore Employment Act or HIRE. The Treasury Department is expected to release regulations that will guide foreign financial institutions, accountants, attorneys and taxpayers, trying to adhere to the provisions. While the law goes into effect in 2013, financial institutions and the rest of us are gearing up.
By 2013, foreign financial institutions will be required, among other things, to provide information about each of their U.S. owned or controlled accounts, disclose information to the IRS and withhold U.S. taxes on these accounts if necessary. If a covered foreign financial institution tries to evade the new law’s disclosure, reporting and withholding requirements by assisting U.S. taxpayers, it risks unacceptable consequences such as losing its U.S. correspondent banking relationships. The new law also imposes a punitive 30 percent withholding tax on payments of U.S. investment income to non-compliant foreign banks in order to enforce new reporting requirements on certain foreign accounts held by U.S. taxpayers. It also increases the statute of limitations for civil tax examinations to six years in the case of an omission of income from foreign sources.
The IRS has set up shop in foreign jurisdictions, and is going after those suspected of non-compliance under existing law. While many taxpayers are aware of the danger, they choose to ignore it. Some feel that the odds are in their favor. If they got away with it this long, who’s to say their luck won’t hold? Finally, because some aspects of federal tax laws are so complicated, some taxpayers don’t know they are not in compliance.
The Obama administration has offered a carrot-and-stick approach to encouraging taxpayer compliance. A 2009 voluntary disclosure program permitted taxpayers with undisclosed offshore accounts and income to voluntarily disclose them, mitigate substantial penalties and decrease the risk of criminal prosecution. According to the IRS, taxpayers came forward with about 15,000 voluntary disclosures, covering banks in more than 60 countries. At the same time, the Department of Justice increased civil and criminal prosecutions against those taxpayers not in voluntary compliance and the Treasury Department increased enforcement of cross-border withholding taxes.
Aside from the ethical questions, from a financial perspective, committing tax crimes is never an act of good judgment. On Feb. 8, the IRS announced its 2011 Offshore Voluntary Disclosure program that expires on Aug. 31, 2011. Because the government is willing to negotiate, coming in from the cold is an idea more than worth considering.
While some taxpayers feel that the financial costs of entering the Offshore Voluntary Disclosure program are too rich form their taste, the costs of combating the U.S. Government in a tax prosecution can be ruinous. You could win the battle and still lose the war.
Stanley Foodman, CPA, president and CEO of Foodman CPAs & Advisors, P.A., is a forensic accounting and litigation support professional and an international tax expert. He is also a Certified Fraud Examiner.