- Offshore bank accounts aren't the tax safe haven they used to be
- About 7,000 US taxpayers took advantage of the amnesty program offered by the Internal Revenue Service (IRS) by voluntarily reporting their income in offshore accounts
- The program, which ended October 15, 2009, was the result of a recently-settled legal dispute with a Swiss bank
- If you didn't report the income, it's too late now. You may want to report it anyway and face the consequences, because there's no guarantee the IRS will offer amnesty in 2010
October 15, 2009 was the deadline for filing your federal income tax income return if you asked for an automatic six-month extension back in April. It was also the deadline for voluntarily reporting income you had in offshore accounts or else face stiff consequences. And thousands of taxpayers did just that.
Regardless of what you've heard or read, you can't hide money in foreign bank accounts to avoid paying US income taxes on that money. You're better off reporting it. Your tax bill may be higher than it would be if you didn't report it. However, it's a good trade-off considering that you'll avoid having to pay even more in interest and penalties, as well as avoid jail time.
And the IRS isn't going away, either. According to US Senator Carl Levin, who along with other senators proposed a new get-tough federal tax law called the Stop Tax Haven Abuse Act, US loses an estimated $100 billion in tax revenue every year because of money hidden in offshore accounts. The IRS has said that it will use the information it received from UBS AG to track down the tax professionals, attorney or other financial advisers who helped their clients set-up the offshore accounts. Obviously, this will lead to the discovery of other taxpayers with undisclosed offshore accounts.
In March 2009, the IRS gave US taxpayers until September 23rd to voluntarily come forward and disclose any unreported income they have in hidden offshore bank accounts. The IRS later extended the deadline to October 15 because tax professionals and attorneys reported that they couldn't handle the large number of taxpayers that were rushing to take advantage of the offer.
Why the rush? Avoiding income taxes by hiding money in offshore accounts may lead to stiff civil fines and penalties, as well as criminal charges. For example, a taxpayer with an offshore account who doesn't report it (you report it by filing a special IRS Form) faces five years in jail, a fine of up to $250,000, or both. And that's for each year the form isn't filed, which may mean a lot of "back taxes" to pay. The IRS amnesty program offered taxpayers leniency in the amount of interest, fines, and back taxes they'd have to pay if they voluntarily reported the offshore money.
About 7,000 US taxpayers took advantage of the amnesty program. By comparison, about only 100 taxpayers took advantage of a similar program for the 2008 tax year. According to the IRS, tax dodgers hid money in more than 70 countries, with accounts ranging from $10,000 to millions of dollars.
Why the drastic increase in voluntary disclosures? One reason may be because the IRS is closing in on many tax dodgers who've been using offshore accounts. The IRS began the amnesty program soon after UBS AG, a giant Swiss-based bank, agreed to turn over the names of close to 4,500 account holders as part of the settlement of a lawsuit filed by the US government against the bank. In early October, those account holders were notified by the bank that their names were being disclosed to the IRS.
The lawsuit was part of a bigger scheme by the Obama administration to crack down on US taxpayers who are avoiding income taxes by hiding money overseas.
It's too late to take advantage of the amnesty program for the 2008 tax year. It's likely, however, that the IRS will offer a similar program for 2009. But don't wait for it. There's no guarantee that it will be offered, and even if it is, there's no way of telling what the IRS will offer by way of reduced penalties. And don't bother calling the bank and closing the account. As a general rule, if you had money in an offshore account during 2009, you'll have to report it on your 2009 return.
Questions for Your Attorney
- Someone used my personal information to open an offshore account and the IRS is looking to me for back taxes and fines. What can I do?
- My tax preparer told me that I don't have to report an offshore account that's in my minor child's name. Is that right?
- If the IRS discovers my offshore account, can it freeze the account or take the money from the account?