March 6, 2021

Wealth Matters: For the 2nd Time, Voluntarily Disclose Your Offshore Accounts, or Else

Everyone should know this, but that makes the Internal Revenue Service’s current program of voluntary disclosure intriguing. The program came about after a similar one in 2009 drew in some 15,000 formerly undeclared accounts. But after it officially ended, thousands more came forward, flooding the I.R.S. enforcement system.

So it made sense from an I.R.S. perspective to offer a second round of disclosure, which began in February and ends on Sept. 9. (The deadline, originally Aug. 31, was extended Friday because of Hurricane Irene.)

Yet the structure of this program has given pause to people who haven’t declared offshore accounts. The penalties are steeper — up to 25 percent of the value of the assets — and they’re assessed on the highest value of those assets over the last eight years.

The Justice Department, which prosecutes tax evasion cases, is making sure people know that the penalties are real. Earlier this month, it announced that a California man named Robert E. Greeley had pleaded guilty to filing a false income tax return that concealed $13 million in two offshore accounts at UBS in Switzerland. Mr. Greeley paid a $6.8 million penalty for his failure to file a report of foreign bank accounts.

The penalty could have been worse. Mr. Greeley had set up two shell companies in the Cayman Islands to hide his ownership of the accounts. When someone willfully seeks to evade taxes, as he did, the penalty can be as high as 50 percent of the account value for every year it existed. (A separate fraud penalty can also be levied.)

“Some people will say, ‘I didn’t have my account at UBS so they’re not going to find out,’ ” said Warren Whitaker, a partner in the individual clients department at Day Pitney in New York. “The reality is the world is shrinking, and people who think they can squeak by and they won’t get caught are kidding themselves.”

So regardless of how the rest of us may feel about tax evaders, what should someone with an offshore account do? There are two options: join the program or go it alone and take your chances. Here’s a look at the two options.

VOLUNTARY DISCLOSURE The main benefit of the second round of the I.R.S.’s offshore voluntary disclosure initiative is that people who come forward will not face criminal charges. They will owe a lot of penalties, but these may be less than if they were caught. (While the program officially ends on Sept. 9, the I.R.S. has said taxpayers who make a good-faith effort to comply may be able to file for an extension.) There are three groups of people for whom this program makes a lot of sense.

The first is people who inherited money from a relative in another country and kept it there. The penalty for inherited money is 5 percent of the account value, and paying this would save the person from a lengthy negotiation over a penalty that might end up being more. But there is one caveat: if, say, the person moved the inherited account from Italy, where the relative lived, to a bank in Switzerland, the I.R.S. could use that move as reason to increase the penalty to the full 25 percent because it was no longer a passive account.

In the second group are people who put the money offshore in better times and need it now. Gone are the days when banks would quietly accept large sums of money wired in from offshore accounts. Today, banks are required to file a suspicious activity report if money appears to be coming in from an undeclared account.

“They can’t just call their banker in Geneva and say, ‘Can you wire-transfer me $150,000?’ ” said Asher Rubinstein, a lawyer in New York who specializes in offshore tax issues. “So they’re saying, ‘Let me clean it up, make it compliant, and bring it here.’ ”

The third group is people who willfully hid money offshore to avoid paying taxes. If they are caught after the voluntary disclosure program ends, they could face penalties worse than Mr. Greeley’s.

NEGOTIATING The big difference from the last voluntary disclosure program is that this one is levying penalties on all assets kept abroad, not just financial assets.

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