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Risky Business - Undisclosed Offshore Accounts

The I.R.S. has introduced new Streamlined Filing Compliance Procedures (SFCP) for certain resident and nonresident taxpayers to report undisclosed foreign financial assets. The “look-back” period is three years. If a resident taxpayer qualifies, SFCP applies a 5% miscellaneous offshore penalty on the assets. If a non-resident qualifies, all penalties are waived. SFCP carries no other tax penalties related to the non-U.S. source income. SFCP does not immunize the taxpayer from a later civil audit or criminal prosecution, nor does it apply to the domestic portions of a voluntary disclosure, which are subject to full examination and full penalties.

By contrast, the 2014 Offshore Voluntary Disclosure Program (OVDP) spans eight years and imposes an offshore penalty 27.5% on the highest asset balance, plus every applicable penalty on the full amount of tax on unreported foreign income.

Why the more favorable penalty structure? Taxpayers eligible for SFCP must certify under penalties of perjury that their conduct was “non-willful” due to negligence, inadvertence, or mistake or conduct that is the result of good faith misunderstanding of the requirements of law. I.R.S requires a lengthy, detailed narrative statement giving specific reasons for the failure to report. The taxpayer is also subject to wide-ranging inquiry by I.R.S., which will surely focus on the operation of the foreign accounts and the taxpayer’s knowledge and involvement. These are questions of fact and circumstance.

Voluntary disclosure is not a do-it-yourself project. SFCP and OVDP are one-way streets—a submission to one precludes participation in the other. Whether and how to disclose foreign financial assets are judgment calls best informed by professionals familiar with I.R.S. policy and procedure.

For further information, contact Paul Murphy.

TaxBryan Shortirs, fbar