The IRS Dirty Dozen 2015, #5: Offshore Tax Avoidance

In May of 2014, the Department of Justice announced that Miami resident Carl R. Zwerner was being held liable for penalties that actually exceeded the value of his undeclared Swiss bank account holdings.

We have already written extensively on the successful crackdown on offshore tax avoidance, and we’re not in the least bit surprised that it made the IRS’ “Dirty Dozen” Tax Scams list again this year. 

The old techniques no longer work

The U.S. is one of few countries in the world that taxes its citizens and residents on their worldwide income. This has and always will be the main reason why individuals and companies have attempted over the years to hide their overseas income and assets. 

Gone are the days of easily hiding income in offshore banks and brokerage accounts, nominee entities and aliases, foreign trusts and other vehicles. 

It’s not illegal to have a foreign account

The IRS agrees that “there are legitimate reasons for maintaining financial accounts abroad.” However, you are obligated to declare those accounts to the U.S. Treasury and you have to report all income earned abroad. 

Note that there is a concentrated effort of governments worldwide to close all foreign tax-avoidance loopholes, and laws are changing to make it increasingly difficult to hide foreign assets. In addition, between the phasing in of new foreign account reporting requirements every year and a rise in negotiated agreements with (and lawsuits against) foreign banks, it is more likely than not that your foreign bank will report you if you don’t take the initiative and come clean.  Carl Zwerner learned the hard way that the penalties are extremely harsh-he paid 150% of the value of his Swiss account (50% for each of the three years he failed to declare it).  Noncompliance has simply become too risky to be worth the attempt. 

In sum, feel free to keep your foreign accounts, but don’t forget to file your annual FBARs and to report income earned abroad on your annual 1040. 

Coming clean through the OVDP

In an effort to encourage taxpayers with foreign assets to come clean, the IRS has an Offshore Voluntary Disclosure Program (OVDP), which has enabled the IRS to recover more than $7 billion to date. In exchange for disclosing foreign assets and paying delinquent taxes, OVDP participants may avoid criminal prosecution and pay significantly reduced penalties. Since 2009, tens of thousands of foreign account holders have taken advantage of this program and have resolved their tax obligations. The Moskowitz, LLP tax law firm has worked with many taxpayers on this program with great success. 

 

#6 on the IRS “Dirty Dozen” list of tax scams is Inflated Refund Claims, which will be the subject of our next blog post in this series. 

 

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