IRS announces new disclosure program for offshore accounts

[MichaelB]

The IRS has reopened its voluntary disclosure program for US citizens with unreported assets abroad.

WASHINGTON — The Internal Revenue Service today reopened the offshore voluntary disclosure program to help people hiding offshore accounts get current with their taxes and announced the collection of more than $4.4 billion so far from the two previous international programs.
The IRS reopened the Offshore Voluntary Disclosure Program (OVDP) following continued strong interest from taxpayers and tax practitioners after the closure of the 2011 and 2009 programs. The third offshore program comes as the IRS continues working on a wide range of international tax issues and follows ongoing efforts with the Justice Department to pursue criminal prosecution of international tax evasion. This program will be open for an indefinite period until otherwise announced.

The new penalty is slightly higher for the largest accounts.

For the new program, the penalty framework requires individuals to pay a penalty of 27.5 percent of the highest aggregate balance in foreign bank accounts/entities or value of foreign assets during the eight full tax years prior to the disclosure. That is up from 25 percent in the 2011 program. Some taxpayers will be eligible for 5 or 12.5 percent penalties; these remain the same in the new program as in 2011.

Details here IRS Offshore Programs Produce $4.4 Billion To Date for Nation?s Taxpayers; Offshore Voluntary Disclosure Program Reopens

 

[nun]

I bet there are lots of 8621 tax forms being prepared right now. I have no sympathy for the Americans who invest overseas in an attempt to avoid the IRS, but I do feel sorry for the innocent expat American investor who buys a foreign mutual fund and then realizes they must comply with PFIC rules. The voluntary disclosure is mostly for big time [-]tax avoiders[/-] investors; regular investors can usually avoid penalties if they do back taxes, FBAR and eventually FATCA as long as there is little or no tax due.

http://www.thunfinancial.com/admin/uploads/NeverOwnForeignMutualFunds.pdf

 

[Texas Proud]

I bet there are lots of 8621 tax forms being prepared right now. I have no sympathy for the Americans who invest overseas in an attempt to avoid the IRS, but I do feel sorry for the innocent expat American investor who buys a foreign mutual fund and then realizes they must comply with PFIC rules. The voluntary disclosure is mostly for big time [-]tax avoiders[/-] investors; regular investors can usually avoid penalties if they do back taxes, FBAR and eventually FATCA as long as there is little or no tax due.

http://www.thunfinancial.com/admin/uploads/NeverOwnForeignMutualFunds.pdf

I find it interesting that they seem to be placing the blame on the Obama admin....

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"Because the Obama Administration and its allies in Congress are pushing through legislative and administrative changes designed to increase tax compliance among American citizens living abroad. "

Heck, I would think that any administration should be going after the tax cheats... I know that they were talking about the innocent ones who got caught up in this rule, but it is the rule and they should follow it...

I know when I was an ex-pat, there were a LOT of items and rules that I had to follow... it is part of living abroad...

 

[MichaelB]

I bet there are lots of 8621 tax forms being prepared right now. I have no sympathy for the Americans who invest overseas in an attempt to avoid the IRS, but I do feel sorry for the innocent expat American investor who buys a foreign mutual fund and then realizes they must comply with PFIC rules. The voluntary disclosure is mostly for big time [-]tax avoiders[/-] investors; regular investors can usually avoid penalties if they do back taxes, FBAR and eventually FATCA as long as there is little or no tax due.

http://www.thunfinancial.com/admin/uploads/NeverOwnForeignMutualFunds.pdf

You've mentioned this before. It is an inconvenience, but at the same time, it is a compliance measure, and the complexity may be the consequence of the level of evasion currently practiced. Who knows - as more western governments find themselves short of collections they may greater motivation to participate in this scheme, improve reporting and make it easier for everyone - this is, except the tax evaders.

 

[REWahoo]

...and make it easier for everyone - this is, except the tax evaders.

I can already hear them screaming.

 

[ziggy29]

I bet there are lots of 8621 tax forms being prepared right now. I have no sympathy for the Americans who invest overseas in an attempt to avoid the IRS, but I do feel sorry for the innocent expat American investor who buys a foreign mutual fund and then realizes they must comply with PFIC rules. The voluntary disclosure is mostly for big time [-]tax avoiders[/-] investors; regular investors can usually avoid penalties if they do back taxes, FBAR and eventually FATCA as long as there is little or no tax due.

I would hope that the IRS can show at least some ability to distinguish between the big time intentional tax evaders and those who, out of ignorance but not fraudulent intent, do something that results in undeclared overseas incomes.

I know the IRS sometimes shows compassion and waives penalties for elderly folks who make mistakes in terms of not taking RMDs, for example, so I'd hope that the "innocent expat American investor who buys a foreign mutual fund" without intent to evade taxation would be given similar leeway.

 

[nun]

You've mentioned this before. It is an inconvenience, but at the same time, it is a compliance measure, and the complexity may be the consequence of the level of evasion currently practiced. Who knows - as more western governments find themselves short of collections they may greater motivation to participate in this scheme, improve reporting and make it easier for everyone - this is, except the tax evaders.

What scheme do you mean?

Foreign governments tax on the basis of residency unlike the US which does it on citizenship. So no matter where a US citizen lives if they own a foreign mutual fund it falls under PFIC and the gains will be taxed as income. For UK citizens a similar situation only arises if they are tax resident in the UK. If they live outside the UK there is no tax liability on foreign mutual funds.

 

[Alan]

Foreign governments tax on the basis of residency unlike the US which does it on citizenship. So no matter where a US citizen lives if they own a foreign mutual fund it falls under PFIC and the gains will be taxed as income. For UK citizens a similar situation only arises if they are tax resident in the UK. If they live outside the UK there is no tax liability on foreign mutual funds.

To be clear, the US taxes are based on residency AND citizenship. (I was resident here for 11 years without being a citizen and paid the same taxes as a citizen, including FICA and Medicare).

 

[james7]

To be clear, the US taxes are based on residency AND citizenship. (I was resident here for 11 years without being a citizen and paid the same taxes as a citizen, including FICA and Medicare).

That is true; the US taxes all "US persons", which consists of all US citizens regardless of where they reside in the world, and all US residents, regardless of what country they are citizens of.

 

[nun]

That is true; the US taxes all "US persons", which consists of all US citizens regardless of where they reside in the world, and all US residents, regardless of what country they are citizens of.

Correct, I neglected the taxation of residents as that's the general rule. Like Alan I spent 15 years in the US as a resident alien and paid FICA, medicare, state and local taxes. Being a UK citizen I have no UK tax liability because of my US investments until I move back to the UK and become tax resident there.

The US is exceptional in taxing it's citizens in the same way whether they live in the US or abroad. The US resident alien often falls foul of offshore tax issues as they are more likely to have foreign accounts and investments than the average US citizen. However, US residents can easily organize their financial affairs to use US accounts. When you are an expat it becomes necessary to have foreign accounts and it is convenient to have investments in local funds and currency. For the US expat doing those things that we take for granted becomes complicated and has large potential penalties.

Take the case of a US citizen, taxed resident and on an arising basis in the UK who wants to invest some after tax money in a mutual fund. If they buy a UK fund it will fall under US PFIC rules and gains will be taxed as income. If they buy a US mutual fund it it will be a "non qualified fund" to the UK tax people and the gains will again be taxed as income and you have no CGT allowance.....it's a Catch 22 so you are constrained to individual stocks and the book keeping involved or CDs and saving accounts.

 

[MichaelB]

What scheme do you mean?

Foreign governments tax on the basis of residency unlike the US which does it on citizenship. So no matter where a US citizen lives if they own a foreign mutual fund it falls under PFIC and the gains will be taxed as income. For UK citizens a similar situation only arises if they are tax resident in the UK. If they live outside the UK there is no tax liability on foreign mutual funds.

Some European governments tax the wealth of their citizens, and some of those citizens relocate their assets to offshore accounts to avoid that taxation. In recent years there have been incidents where Swiss bank employees have offered to sell lists of clients to government tax authorities.

Take the case of a US citizen, taxed resident and on an arising basis in the UK who wants to invest some after tax money in a mutual fund. If they buy a UK fund it will fall under US PFIC rules and gains will be taxed as income. If they buy a US mutual fund it it will be a "non qualified fund" to the UK tax people and the gains will again be taxed as income and you have no CGT allowance.....it's a Catch 22 so you are constrained to individual stocks and the book keeping involved or CDs and saving accounts.

I have never known anyone affected by PFIC issues (outside of this forum). Most US expats invest in US capital markets even when they are living abroad, so this appears to be a big issue but for only a few unfortunate people.

 

[nun]

Some European governments tax the wealth of their citizens, and some of those citizens relocate their assets to offshore accounts to avoid that taxation. In recent years there have been incidents where Swiss bank employees have offered to sell lists of clients to government tax authorities.

If the European citizen relocates with their money then his/her country of origin will not tax their wealth. However, hiding money overseas to avoid taxation by your country of residence is always going to be an issue,

I have never known anyone affected by PFIC issues (outside of this forum). Most US expats invest in US capital markets even when they are living abroad, so this appears to be a big issue but for only a few unfortunate people.

PFIC isn't an issue mostly because of ignorance of it and that the IRS hasn't been enforcing it. US expat forums are littered with people who own UK stocks and shares Individual Savings Accounts that fall under PFIC rules. However, my bigger point is that even if the US expat invests in US capital markets to avoid PFIC, they will have to comply with the equivalent of PFIC in their country of residence. In the case of the UK the legislation eliminates the CGT allowance and taxes all dividends and gains from 99.9% of US mutual funds as income.