Foreign Investments: What You Don’t Know Can Hurt You

The government has issued strict penalties to those hiding illegal offshore accounts, ranging from monetary fines to prison sentences. There are many types of offshore tax issues, and the Internal Revenue Service (IRS) tends to view them all equally. Although this may seem beneficial from a regulatory standpoint, it may not be fair to every type of investor.

As the Wall Street Journal highlighted in a recent article, public policy seems to favor harsher treatment of a "shady" businessman who intentionally hides funds compared to a taxpayer of foreign descent whose relatives in his home country innocuously began an account in his name without his knowledge, or an elderly Holocaust survivor that simply forgot about a preexisting account in another country.

Details of IRS Extension of Offshore Voluntary Disclosure Initiative

The Offshore Voluntary Disclosure Program (OVDP) was scheduled to be a short-lived, one-time opportunity for those with foreign accounts to file the necessary paperwork to legitimize those accounts and pay any relevant penalties voluntarily. Although it was scheduled to end, the IRS will renew the program a third time as the agency continues to wade through international tax issues and pursue criminal prosecution of those purposefully evading international taxes.

The program is now opened indefinitely but with a few modifications. This change was likely brought about by the massive amount of revenue already collected under the program: upwards of $4.4 billion.

Changes to the program include:

  • No set deadline to apply to take part in the program - but penalties could increase in coming years, so taxpayers are encouraged to apply sooner rather than later
  • Taxpayers in the highest penalty category pay a 2.5 percent higher penalty than in the previous plan, but all other levels remain the same
  • Those taxpayers who already disclosed the existence of foreign accounts are "grandfathered" into the new OVDP program

Benefits of Taking Advantage of OVDP Early

Voluntarily disclosing the information will not save an investor from penalty fees and back taxes, but it can help avoid criminal prosecution. Agents for the IRS are routinely conducting investigations on individuals they suspect hold foreign accounts.

There are many legitimate reasons to hold foreign accounts and valid reasons to have an account in your name without your knowledge. Whether used for frequent vacations or inherited unbeknownst to the receiver, these accounts may be deemed by the IRS to qualify the holder for international tax evasion. Navigating through these issues is complex, and the counsel of an experienced tax attorney is highly recommended to ensure that your legal compliance is assured and your rights are protected.