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New stiffer penalties for Offshore Voluntary Disclosure Program

Compliance with the law routinely depends upon a carrot and stick approach.

We recently discussed the new streamlined filing measure for those who have failed to disclose foreign accounts. For Americans living abroad it was good news: an expanded program and reduced penalties.

The story is much different for anyone in the U.S. who willfully failed to disclose an offshore account. These individuals will face much larger tax penalties after August 4, 2014. This post will explain the change in approach.

The Internal Revenue Service can update the current version of the Offshore Voluntary Disclosure Program (OVDP) at any time. This third round opened in 2012 and does not have an end date, but could end at any time. Soon penalties will increase.

It's part of an effort to close the tax gap and go after U.S. citizens and residents who keep money in accounts abroad to avoid paying U.S. taxes. These offshore accounts are subject to U.S. tax laws and income earned may be subject to capital gains or other taxes.

The OVDP has allowed taxpayers who had not disclosed their account(s) to come forward, pay back taxes, interest and penalties. But generally with the guarantee that they would not be prosecuted criminally. A number of those who have taken part in the program actually inherited these accounts. The top penalty was 27.5 percent of the highest balance held in the account during a year. 

That will change beginning on August 4, 2014. The penalty increases to 50 percent. Those who have accounts at financial institutions that are under IRS investigation will have to pay the higher penalty.

A current list includes 10 banks, however, that number is likely to grow as countries start to exchange more information about accountholders. Now is the time to ensure that any foreign account valued at more than $10,000 is compliant.

Source: IRS.gov, "Offshore Voluntary Disclosure Program Frequently Asked Questions and Answers," Accessed July 7, 2014.

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