Oct 2009 Americans with undeclared offshore accounts have been under growing pressure since Switzerland agreed to hand over data to the authorities in the United States on as many as 4,450 UBS accounts. The act of providing financial details of as many as 52,000 accounts to the United States is very alarming.
Following the closing of the Internal Revenue Service ("IRS") "Amnesty" Program (extended to 15 October 2009), many individuals seeking to take advantage of the reduced penalties regime have not yet filed the three-page information disclosure letter released 29 July or submitted to an interview, according to Rick Raven, director of operations, policy and support in the IRS Criminal Investigations division.
The IRS is currently considering imposing a deadline for the submission of required disclosures to remain eligible for the program. Although no decision has been made, it could possibly extend the deadline to be 15 January 2010, according to Rick. But a longstanding Internal Revenue Service program for people who turn themselves in remains in place.
On 27 October 2009, House and Senate Democrats introduced offshore tax compliance legislation expanding the authority of the IRS to "detect, deter and discourage offshore tax abuses" involving U.S. taxpayers with foreign assets. This proposed legislation is designed to focus on individual offshore tax compliance provisions included in the Obama Administration's FY2010 budget.
Key provisions include the following (various effective dates apply):
- Require increased reporting on certain foreign bank accounts by imposing a 30-percent withholding tax on income from U.S. financial assets held by a foreign financial institution unless the foreign financial institution agrees to disclose the identity of the U.S. account holder and additional information on account transactions;
- Require foreign corporations to provide withholding agents with information identifying any U.S. individual that is a substantial owner of the foreign corporation, holding more than ten percent of the foreign corporation's stock (by vote or value). The bill would exempt publicly held and certain other foreign corporations from these reporting requirements, and would grant the Treasury Department regulatory authority to exclude other recipients. Similar rules would apply to foreign trusts. A 30-percent withholding tax would apply for failure to comply with the proposed reporting requirements;
- Require any individual or entity with foreign accounts or financial instruments worth more than $50,000 in aggregate to file an information return with the taxpayer's annual tax return;
- Impose a 40-percent penalty for underpayments attributable to undisclosed foreign financial assets; and
- Double the current three-year statute of limitations to six years for certain underreporting of income in connection with foreign financial assets and failure to comply with certain new information return reporting requirements. The limitation period would not begin to run until the taxpayer files an information return disclosing reportable foreign assets.
If enacted, the legislation includes additional disclosure provisions that would apply for certain persons providing assistance in acquiring or forming a foreign entity, would require additional passive foreign investment company reporting, and would apply e-filing requirements to certain financial institution returns. The legislation also proposes new compliance provisions for certain foreign trusts, and would provide a new minimum $10,000 penalty for failure to report certain foreign trusts.
Observation As the financial world grows more transparent together with other tax jurisdictions share their information, taxpayers who continue to hold undeclared taxable accounts are increasingly at risk of being discovered. The penalties for such continued action can be severe. According to IRS Commissioner Shulman, 'for taxpayers who continue to hide their head in the sand, the situation will only become more dire.'
The IRS has already opened offices in Beijing in connection with the new tightened guidelines on the noncompliance investigation. The agency also intends to add about 800 employees in the next few years to strengthen this coverage on IRS overseas offices, including Hong Kong. Therefore, it is very important to seek professional help to handle the investigation properly with the IRS.
