Offshore Assets: Can You Afford Not to Disclose?

By: Mark W. Schweighofer

Media Type: Alert

With another tax season upon us, it is critical that we remind clients of the Internal Revenue Service's continued focus on the disclosure of taxpayers' offshore assets. Our firm continues to observe that many individuals are unaware of the need to disclose certain foreign assets and the staggering penalties that can apply for failure to properly disclose.

For instance, every U.S. citizen or resident who owns or has signing authority over one or more foreign bank accounts with an aggregate balance over $10,000 is generally required to file a Foreign Bank Account Report (FBAR) by June 30 of each year. In addition to any back taxes, penalties and interest on any unreported income associated with such accounts, criminal exposure can range from up to $500,000 in fines and 10 years in prison. Civil penalties can reach the greater of $100,000 or 50% of the aggregate balance of the foreign account(s) each year for a period of six years. In some cases, the penalty can exceed the value of the account.

While the FBAR gets most of the press, similar draconian penalties can apply to taxpayers who fail to:

  1. Report "specified foreign assets" in excess of certain thresholds;
  2. Report distributions received from a foreign trust;
  3. Report gifts received from foreign persons; or
  4. Disclose ownership of foreign entities.

The penalties for any of these violations start at $10,000 per violation and quickly escalate.

The Offshore Voluntary Disclosure Program ("OVDP") remains an option for individuals who failed to disclose in prior years. While the OVDP generally allows avoidance of any threat of criminal prosecution, it is not appropriate in all instances and can result, in some cases, in higher penalties than might otherwise apply outside of the program.

While the IRS has not announced an end date for the current version of the OVDP, it has cautioned that it could terminate the program at any time. Additionally, given the increased information sharing between the IRS and foreign governments, a strategy of avoidance is becoming increasingly untenable. Accordingly, time is running out for noncomplying individuals to get ahead of the IRS on matters relating to foreign asset disclosure.

Given the complexities of the issues and the magnitude of the penalties, it is important for individuals to consult with qualified counsel in connection with the disclosure of their offshore assets. In some cases, it may be possible to avoid penalties entirely. In others, it may be possible to pay a significantly reduced amount.

Mark Schweighofer, a principal of Stein Sperling's tax department, has extensive experience assisting clients in this area, and a record of success in reducing or avoiding penalties, which makes him uniquely qualified and willing to advise on such matters. If you have any questions about foreign asset disclosure, including the terms of the OVDP, please contact Mark at (301)838-3233 or by e-mail.

Stein Sperling's tax law attorneys counsel clients on the intricacies of business and personal taxes in order to minimize tax liabilities. Each of our tax law attorneys holds either a Master of Laws in Taxation degree or is a Certified Public Accountant or both. We participate in programs that allow us to stay on top of the rapidly changing world of tax laws, regulations, cases and rulings. We decode the tax talk and carefully guide our clients, helping them understand the big picture tax implications and tailoring strategies that benefit their short- and long-term objectives.

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