U.S. Taxpayers are required to declare on an annual basis income earned from foreign financial accounts by the filing of IRS Form TD F 90-22.1. For years, offshore accounts in certain countries have made it possible for these taxpayers to park money outside of the U.S., concealing that income from the IRS. It is estimated that billions of dollars in income tax revenues is lost every year to undisclosed offshore accounts.
While the IRS has urged compliance by implementing “amnesty” programs in the past, none has had the response of the current disclosure program commenced in March of this year. The disclosure program, which is currently scheduled to end on September 23, 2009, asks the taxpayer to volunteer information by following the procedure set out in IRS IRM 22.214.171.124 in exchange for avoiding substantial civil penalties and criminal prosecution.
According to a recent Wall Street Journal (WSJ) article, Tax Evaders Flock to IRS to Confess Their Sins, the volume of wealthy taxpayers filing for relief as a result of the Offshore Voluntary Disclosure Initiative has overwhelmed the IRS. An example provided in the WSJ article, helps explain the dramatic response. Under the disclosure program, a taxpayer with offshore accounts in the amount of $1 million that earns $50,000 in annual income for a six year period might end up paying $386,000 plus interest. A non-disclosing taxpayer might incur a $2.3 million penalty in addition to criminal prosecution.
It is not just the reduced penalties that are causing the influx of confessors. Recent federal court decisions have authorized the IRS to request information from foreign-based financial institutions.If you are interested in learning more about the Offshore Voluntary Disclosure Initiative, there is a IRS Frequently Asked Questions (FAQ) release, recently modified on July 31, 2009.