Offshore Tax-Penalty Forgiveness Program Closes in 2018

The United States doesn’t specifically track all of its citizens who live outside of its borders, but the State Department estimates that 6.8 million U.S. citizens lived outside of the U.S. in 2013.

All citizens, regardless of where they live, are required to file a tax return. Many people who are obligated to file these returns face no tax liability, meaning they probably won’t pay any tax. But failure to file even an informational return every tax year can result in dire consequences.

“Millions of people, ex-pats living out of the U.S., are not filing returns,” says Miami-based tax litigator Alan L. Weisberg. “Informational returns have a ton of penalties associated with not filing them, even when there is no tax due normally. The civil penalties are draconian—they can be confiscatory.”

But there is an Internal Revenue Service (IRS) program that can help. The Offshore Voluntary Disclosure Program, also known as the Voluntary Offshore Initiative, was established by the IRS to allow citizens with foreign bank accounts to come in and voluntarily disclose their accounts.

Weisberg explains the three benefits of disclosing: “One, if you come in voluntarily and you qualify, you will not be prosecuted. Two, they will only go back eight years—anything that happened more than eight years ago, you completely skate on. Three, the penalties are less.”

Under the current IRS code, these penalties are probably more than expected. For example, a million-dollar undisclosed account in Belgium that didn’t change for six years could, in theory, be given a 50 percent penalty of $500,000 for each of those six undisclosed years, equaling $3,000,000 in charges—even if you only ever had one million in the account. “In reality, it’s unlikely that the IRS would charge that that much,” says Weisberg. “But, if you come into the program, you only pay a penalty of 27.5%, or $275,000. It sounds harsh, but compared to what they could do, it’s a great advantage.”

This program closes Sept. 28, 2018. Weisberg says the number of people entering the program has been decreasing. “A lot of the low-hanging fruit of people with foreign bank accounts have come in. The word has gotten out about it,” he says. If you hope to get in before the deadline, you must not only start this process, which is lengthy, but file all reporting requirements before the date.

There are, however, other programs that errant tax payers or filers can participate in. The IRS created a streamlined process for disclosure. In this program, your failure cannot be willful.

“In the Voluntary Disclosure Program, the IRS didn’t care what your motive was,” says Weisberg. “You can cheat, come in, pay your 27.5 percent, file amended returns for eight years, pay the tax you should have for those eight years, pay a penalty and reduced interest, and its done. No questions asked. End of the story.”

Under the streamlined process, the penalties are lower, but you have to certify under penalties of perjury that your failure to file or report was a mistake or negligence, and that it was not willful. “In the last few months, we’ve had several clients who are being audited on these certifications, and one is about to be indicted under false certifications,” says Weisberg. “The IRS is going after people that have tried to falsely certify.”

As the VDP closes, efforts on the part of the IRS to find offshore accounts may increase. “Now what’s going to happen, is they will go after people that aren’t in the program,” adds Weisberg. “It’s a question of pay me now or pay me later. It’s a lot cheaper, and you can get amnesty, if you come in. But it’s not without its pain.”

If you are U.S. taxpayer living outside of the U.S., and you have not disclosed all of your bank accounts; or, if you have a bank account in a foreign country, you must contact a reputable and experienced tax attorney as soon as possible. “The IRS can put liens on your house, levies on your bank accounts, and even take your social security check and pensions,” says Weisberg. “The IRS has a phenomenal amount of power. … There are things we can do to help people fight this power, and to help them navigate the different options that are available to them.”

If you want additional information on this area of tax law, see our tax overview.