U.S. permanent residents and all U.S. citizens, no matter where they live, to declare virtually all offshore accounts with an aggregate value of $10,000 or more. Income generated from these accounts is also taxable. I most recently wrote about these obligations here.
U.S. citizens living abroad have a unique reporting burden, as no other civilized country requires its non-resident citizens to comply with similar requirements. To make matters worse, the IRS has made it a top priority to chase down the millions of U.S. citizens living abroad that it believes are non-compliant in their tax or reporting responsibilities. Using bribes, paid informants, indictments, plea bargains, and other strong-arm tactics, the IRS and Department of Justice have steamrolled over bank secrecy laws in every country with a significant offshore financial sector. It has also forced these jurisdictions to sign one-sided information-sharing agreements, known as "tax information sharing agreements" (TIEAs).
The outcome has been predictable. For instance, in one country, apparently using a recently ratified TIEA as authority, dozens of IRS agents have fanned out looking for non-compliant U.S. taxpayers living or doing business there. At least some of them are carrying firearms. How would you feel if an SUV full of armed IRS agents pulled into your driveway?
By the way, many of these non-compliant U.S. taxpayers don't owe any tax in the country in which they live. But that makes no difference to the IRS. It treats U.S. citizens living abroad who are fully compliant with their tax obligations in their residence country as common criminals.
This is one big reason why the numbers of U.S. citizens expatriating has skyrocketed in recent years. Unfortunately, while expatriation eliminates future IRS tax and reporting obligations, it does nothing to deal with existing ones. However, you have the right to expatriate, even if you owe money to the IRS, as explained in my Billionaire's Loophole report.
Not surprisingly, with the "stick" also comes a "carrot." To "gently" encourage what it believes are millions of tax scofflaws to come forward, in 2009 and again in 2011, the IRS carried out its much-hyped offshore voluntary disclosure program (OVDP).
Now, the IRS has decided to make the OVDP a permanent feature of the international tax landscape (although it avoids using the word "permanent"). Earlier this month, the IRS announced that it would "reopen" the 2011 OVDP with no deadline. It's not hard to figure out why. According to official IRS statistics, the 2009 and 2011 OVDPs have resulted in more than $4.4 billion in taxes and penalties to date.
The structure for this permanent OVDP is almost identical to the one that ended last September. The one significant difference is that the penalty most U.S. taxpayers must pay for an undisclosed offshore account is now 27.5% of the highest aggregate balance in foreign bank accounts/entities or value of foreign assets during the eight full tax years prior to the disclosure. The penalty was 25% for the 2011 program. As before, some taxpayers remain eligible for a reduced penalty framework of 5% or 12.5%, respectively.
Should you participate in the OVDP? The answer is maybe, but only after you consult with a qualified tax attorney (not an accountant). This arrangement provides attorney-client privilege for your discussions. The tax attorney can then retain an accountant to prepare the necessary returns, and decide whether you should participate in the program.
Copyright © 2012 by Mark Nestmann