So many citizens got caught off guard with the recent attention the IRS is giving holders of offshore bank accounts. With the off-the-shelf deals previously offered, the terms of the settlement were known and predictable. Now that the 2009 and 2011 offshore voluntary disclosure initiatives (OVDI) have ended, the Internal Revenue Service has not yet issued a new OVDI, so many non-compliant people are wondering if they should come forward and what the cost of coming forward will be. With that in mind, here are the four options currently available to those wondering what to do.
The first option is to do nothing except hope and pray. The advantage is that it costs nothing to do, and there is certainly a likelihood of greater than zero, no matter how slight, that the taxpayer can get away with the crime. The downside that is if learned, there is an unbelievable emotional strain for anybody who become a criminal defendant. Even if acquitted, the entire process will be the most arduous time of someone's life. Even if found not guilty, a criminal trial is still incredibly costly.
This is an important caveat. The chances are that the IRS does not discover undisclosed accounts gets smaller and smaller. Why? Because in order to compete for American customer and capital, foreign banks are coerced into complying with the IRS. That's right --- foreign banks take their marking orders from the Internal Revenue Service as well. So if the Internal Revenue Service wants information on US holders of foreign accounts, the IRS will get that information. The IRS will also run names of other people it suspects of being American citizens but who opened their accounts with foreign passports. The Internal Revenue Service has incredible investigative powers --- powers it never had before.
The next option is to renounce nationality and depart the country --- as there is no other way to escape the power of the IRS. But be warned --- this only will avoid upcoming tax debts and compliance issues. The lone way to correctly relinquish is to effectively come forward about all offshore foreign bank financial records and actually forfeit an expatriation tax (in many ways it was easier to leave Soviet Block country than to leave the USA completely intact with your wealth.)
The third option is to simply file amended returns and not explicitedly tell the Internal Revenue Service that you are seeking to voluntarily disclose. This is known as a "quiet" or "soft" disclosure. This is basically a "cheap" alternative and that's is only advantage . But the disadvantages are that you may give the IRS a roadmap to charge you criminally, and if you are caught, you are see high penalties and a nasty and real possibility of criminal charges.
The Department of Justice states that it has begun prosecutions on people who have attempted soft disclosures. So this option has some serious problems
The "soft" disclosure option is incredibly risky for several reasons. One massive failing is that a soft disclosure does not remedy the issue of the taxpayer's non-compliance in FBAR filing; failing to filing an FBAR can be a criminal charge just by itself. So filing a quiet disclosure 't eradicate any likelihood of criminal charges. In fact, the 1040X may --- well here's the massive problem with this option --- the quiet disclosure does nothing concerning the failure to the FBAR. There are still criminal and civil investigations that may be pending for failing to file an FBAR, but simply give the IRS a very handy to locate you.
Option 4: Pre-emptive Disclosure and Negotiation (œ Offshore Voluntary Disclosure Initiative”) This is the optimal solution. Even though the time to disclosure under the 2011 OVDI has expired, it is not too late. The only deal that expired on August 31, 2011 was the particular off-the-shelf terms of the 2011 OVDI. It was simply a pre-agreed upon penalty structure. The Internal revenue service always welcomes voluntary disclosures.
There are only 2 requirements. Initially, the taxpayer can not be under audit. In addition, the source of the funds in the foreign bank accounts can not be from an illegal source. Like drug trafficking or money laundering.
If someone is still questioning what the appropriate course of action is, it is critical that they only speak to a experienced foreign tax attorney. The attorney-client privilege only applies when speaking to an attorney. The IRS can subpoena nearly anyone else to give evidence against a taxpayer.
Recent trends in {tax evasion may be solved through OVDI.
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