U.S. citizens and tax residents are required to report their world-wide income on their federal income tax returns. In addition, these U.S. persons are required, and have been required for some time, to separately report their offshore bank and financial accounts to the Internal Revenue Service (IRS). Over the last five years, the IRS has focused a great deal of its resources on undisclosed offshore accounts held by U.S. citizens and residents, which total in the billions of dollars. To recover undeclared taxes associated with these accounts, the IRS has offered voluntary disclosure programs in 2009, 2011 and 2012 to entice U.S. persons to come forward without the risk of criminal prosecution and much smaller (but still substantial) civil penalties that might otherwise apply. While the IRS has gotten a lot of response to these programs, there has also been a lot of resistance, in that the IRS has used a “one size fits all approach,” treating many innocent people the same as those who were truly hiding assets overseas, and generally requiring the filing of eight years of amended tax returns and foreign bank account filings for all applicants.
On June 18, 2014, in response to many of these concerns, the IRS essentially liberalized the program, allowing U.S. persons residing within and outside the U.S. to utilize a streamlined process to disclose their accounts, with minimal civil penalties and no criminal prosecution risk, upon certification that the failure to disclose the offshore accounts was “non-willful.” Although this is a liberalization of the voluntary disclosure program, there are still risks involved, and clients should discuss the pros and cons with experienced counsel before proceeding.
Several attorneys in the firm's tax section have worked on many of these cases. Not surprisingly, some of the firm's long-standing clients have had undisclosed offshore accounts and have only recently come forward. No doubt there are others who have still not come forward and are at risk if the IRS finds them before they voluntarily disclose their accounts. Of particular relevance is that, effective July 1, foreign financial institutions that wish to invest in U.S. stock and securities without suffering a 30% withholding tax on interest, dividend and eventually principal payments, must agree to disclose the names and U.S. tax ID numbers of their U.S. account holders to the IRS, either directly or through their home country tax agencies.