Voluntary Disclosures and Proof of Source of Funds

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One of the key questions in the IRS Offshore Voluntary Disclosure letter is “source of funds”. For many taxpayers with funds offshore who did not file Foreign Bank Account Reports (FBAR’s) this question presents multiple problems. The problems are discussed below.

First, taxpayers who used an Informal Value Transfer System (sometimes referred to as a Hawala network) cannot easily provide proof of the source of funds other than where the funds currently are deposited. Often these funds have their origination in the taxpayer’s or the taxpayer’s family’s country of origin and were sent to an foreign financial institution through the informal network in order to avoid currency control or disguise the transfer of funds for other reasons. Reasons for not filing FBAR’s for these accounts often vary, but range from simple claims of ignorance of the law to other more complex reasons. But, the failure to file FBAR’s is where the U.S. compliance problem begins for not filing FBAR’s may result in both serious civil and criminal penalties. Civil and criminal tax penalties may also apply if ownership of the foreign accounts was not disclosed on the taxpayer’s income tax returns and if earnings on the accounts were not reported.

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Published In: Criminal Law Updates, Finance & Banking Updates, International Trade Updates, Tax Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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