In recent years, the Internal Revenue Service (IRS) and the U.S. Department of Justice (DOJ) have increased their pursuit of individuals who failed to disclose foreign bank accounts and to file required tax and information returns. In addition to civil penalties for such violations, the government is aggressively pursuing criminal sanctions ranging from monetary penalties to prison. For example, the DOJ recently announced a plea agreement with a 79-year-old Florida woman relating to undeclared, inherited foreign financial accounts that will require her to pay more than $20 million in civil penalties and could result in a prison term of up to six years. A high-ranking IRS special agent also recently warned that information sharing with foreign countries is producing better responses and taxpayers must “come on board or face the consequences.”
Many individuals are unaware that, in addition to being required to report worldwide income, they may also be required to file various information returns relating to items such as foreign bank accounts and assets, interests in foreign entities and transactions with foreign entities, including certain distributions and gifts. This is true even if the information would not lead to any additional U.S. tax. Civil penalties for violations of these reporting requirements vary, generally starting with a $10,000 per violation per year amount that can escalate into higher penalties depending on the facts and circumstances. Criminal penalties include monetary fines and even prison time.
The IRS began an open-ended offshore voluntary disclosure program in 2012 designed to allow noncompliant individuals who failed to report taxable income in the past to come forward and resolve their tax matters. The program, which requires the filing of delinquent forms for the prior eight years and the payment of back taxes, interest and certain penalties, is the only way to achieve finality and avoid criminal prosecution. However, the IRS may end the program at any time in the future. Another IRS program is the streamlined filing compliance procedure for non-resident U.S. taxpayers who failed to timely file U.S. tax returns or disclose foreign bank accounts, and who present a low compliance risk. Other disclosure options may exist depending on an individual’s situation, especially where there is little or no unreported taxable income, and the circumstances may indicate reasonable cause for the filing violations. Given the current environment and the potential civil and criminal penalties, taxpayers should take the necessary steps to ensure they are in compliance with their U.S. tax and information filing obligations.