Mar 14, 2011

Got Offshore Income? IRS Announces New Disclosure Initiative

Ever on the lookout for international tax evaders, IRS recently announced yet a second special program to allow folks with previously undisclosed income from hidden offshore accounts to fess up. Not exactly what you would call an "amnesty," but still probably better than risking the alternative of continued silence, and later getting caught.

The new voluntary disclosure initiative will be available until August 31, 2011. "As we continue to amass more information and pursue more people internationally, the risk to individuals hiding assets offshore is increasing," noted IRS Commissioner Shulman recently. "This new effort gives those hiding money in foreign accounts a tough, fair way to resolve their tax problems once and for all. And it gives people a chance to come in before we find them."

The new initiative is different, in some ways, from its precursor in 2009. The overall penalty structure under the new program is higher than before, so that folks who did not come forth before will not be rewarded for remaining silent in the mean time.

For the 2011 initiative, there is a new penalty framework that requires individuals to pay a penalty of 25 percent of the amount in the foreign account(s) in the year with the highest aggregate account balance during the 2003 to 2010 period. Some taxpayers will be eligible for 5 percent or 12.5 percent rates of penalty. All participants will be required to pay all back taxes and interest, as well as the appropriate late payment and delinquency penalties.

IRS continues to discourage what it calls "quiet disclosure," by which a taxpayers may just file amended returns on their own, and pay related tax and interest for previously unreported offshore income without otherwise notifying IRS in a formal way.

Folks trying this approach run the risk of being examined and potentially criminally prosecuted for all applicable years. That's right -- "criminal" sanctions loom on the horizon and are generally not "pretty." IRS says it has identified, and will continue to identify and closely review amended returns coming their way which report increases in income.

This is a difficult and touchy area -- even though it appears in some sense that IRS is expressing some degree of leniency, perhaps the best approach for anyone with problems of this nature is to consider consulting with tax legal counsel, particularly if the amounts involved are large.

For more information on income earned abroad and how to handle back taxes you owe, check out Nolo's Filing a Tax Return When You Live Outside the U.S. article and Nolo's Back Taxes & Tax Debt section.