With the economy still limping along, or worse, the tax collectors at the Internal Revenue Service (IRS) has seen tax revenues it collects go down. There is a simple reason for this: If you have an income tax based upon income and that income goes down, there is less income to tax, hence less revenue.
This is just one reason why our country is facing the “fiscal cliff.” and the US budget deficit passes to an area of no return. That is no amount of taxing can bridge the gap and the gap with likely be made up by crippling inflation.
So, with so few picking for the IRS to generate revenue to close the fiscal cliff, where should it look?
How about offshore?
In the past, it used to be very easy to hide income in foreign bank accounts. A vacation to Zurich and a visit to a Swiss bank is all that it took. It was virtually impossible for the IRS to ever find out about this money. However, this all changed post-9/11 with a more invasive IRS and a prosecution of Swiss banking giant UBS. UBS was found guilty of helping US taxpayer evade taxes, so as part of a deal to keep many key players out of deal, UBS started to ‘spill the beans’ on the various players involved. This created a domino effect. The end result is that is 10 years, the landscape is totally changed. Whereas it used to be easy to open a foreign bank account for illegitimate purposes, now it is difficult for US taxpayers to open an legitimate foreign bank account.
To expand its coffers and process tax evasion cases quickly, the IRS instituted a new twist to its long-standing Voluntary Disclosure program. The 2009 Offshore Voluntary Disclosure Initiative (OVDI) was intended to find those who were hiding billions of dollars, intentionally from the IRS.
And the 2009 OVDI did do that. Many who were guilty of tax evasion used the program to come clean.
The IRS has offered two additional OVDI’s, one ins 2011 and a now rolling-enrollment OVDI, the 2012. Each time, giving those people who were involved in tax crimes a chance to come forward.
But a funny thing happened. Those who were guilty of tax evasion — that is took money out of the US and opened bank account to evade taxes — have stopped coming forward. These are the taxpayers who are at risk for prosecution and they have double down on continued non-compliance and are attempting to hide.
So who is coming forward?
Those who innocently (or negligently) failed to report foreign bank accounts. Now, how can someone have innocently hidden financial account interest income from the IRS? Well it is simple.
First, only one other country in the world taxes its citizens on worldwide income (that country is named “Eritrea” — a tiny speck of land above Sudan). So the United States is in extremely rare company when it comes to something known as universal tax jurisdiction — where any money you make anywhere in the universe is subject to US taxes.
Second, the 16th Amendment (the amendment that authorized the IRS) does not mention that Americans are taxes on worldwide income. It actually took the activism of the US Supreme Court case, Cook v. Tait to establish universal tax jurisdiction.
Third, many US taxpayers have a relationship with the country their foreign bank accounts are located. Perhaps they were born in the country, perhaps their parents still live their or perhaps they had a rich uncle who they inherited their foreign bank accounts from. There are totally legitimate reasons for having a foreign bank account and the vast majority aren’t trying to do anything shady.
Lastly, historically, there was very little interest in prosecuting and investigating undisclosed foreign income Since 1970, there was a form that was required to be filed by anyone who had foreign accounts over $10,000. This form is called the FBAR. However, this requirement was routinely ignored — sort of like how every American driver ignores highway speed limits. It wasn’t until around 2006 that the IRS got serious about enforcing the law, and only after getting the publicity generated from the UBS case mentioned above.
So it is completely understandable that someone who has foreign bank accounts would fail to properly include the income, yet had no intent to evade taxes.
Because the IRS has recognized this, it has allowed those who made an innocent mistake to still use the 2012 OVDI, yet asked for a lower penalty. And they have even offered a streamlined OVDI for those expatriates who live overseas.
The IRS is enthusiastic going after holders of foreign accounts because:
- They are politically unpopular group. Neither political party is standing up for recent immigrants or those who happen to own or control foreign bank accounts.
- The law is on the side of the IRS. The IRS had vast ability, even if no criminal charges are brought, to impose significant penalties.
- Holders of foreign bank accounts have money. And because of the “fiscal cliff,” the IRS is starved for revenue.
Because of the unique political landscape, and the bizarre taxing system of the United States, and tremendous powers the IRS has, there may be some holder of a foreign bank account reading this article for the first time and discovering that they have a problem right now. If that is the case, they should immediately contact a tax attorney who specializes in helping holders of offshore foreign bank accounts.