For those taxpayers who haven't disclosed their foreign bank accounts for more than two years and who face the prospect now of not only the loss of all their foreign assets but possibly some of their domestic assets in penalties as well, the reason why many don't voluntarily disclose their past reporting failures is simple. They would rather risk criminal prosecution than pay IRS fines, penalties, interest, and lose much of their net worth.
For others it's a matter of embarrassment and humiliation. And yet, they seem willing to risk the notoriety of prosecution.
Others keep their foreign bank accounts secret to avoid implicating their lawyers, accountants spouses, business partners and relatives. Simply filing an FBAR will require a taxpayer to identify joint account holders or other fiduciaries with signature authority who have an independent obligation to file an FBAR.
The willingness of taxpayers facing their fears to come forward or not, is believed by many to be based on the amount of assets involved and hidden by those taxpayers. Persons with the most of these assets are believed to be the individuals having the most to lose and holding out the longest.
Another group thought to be refusing to come forward so far are the big time risk takers who have not been reporting large amounts of income from their businesses and skimming this income, such as restauranteurs and those involved in international trade.
Some U.S. taxpayers have only recently learned what an FBAR is, having never previously reported their foreign bank accounts to their accountants.
In view of the potential loss of all of a taxpayer's assets, and the implication of spouses, friends, relatives and financial or legal advisers, some taxpayers have chosen to do nothing while risking their own civil and criminal prosecution. Given the erosion of bank secrecy and the increased number of tools at the disposal of U.S. tax authorities, the likelihood of such taxpayers staying off the radar of the IRS becomes smaller each day.
Although the IRS announced in May 2009, that "quiet disclosures" the quiet amending of tax returns and payment of tax on the additional reported income by taxpayers would not prevent civil and criminal prosecution, especially for a taxpayer's failure to report their foreign bank accounts or other non-informational reporting, some taxpayers today still try this approach, hoping that the increase in their income will not raise a red flag to the IRS. However, there is probably nothing simpler, in this computer age, than for the IRS to screen such amended tax returns for substantial increases in income. Should the IRS then focus on such a taxpayer and run their names through the wealth of information being obtained from foreign jurisdictions and find the possibility of an unreported foreign bank account or other offshore entity, this category of taxpayer will find himself or herself facing some of the worst IRS penalties and possibly not only the loss of their entire offshore accounts but an obligation to pay additional amounts from their domestic assets as well.
Another category of U.S. taxpayers are those sitting on the fence considering voluntary disclosure but not quite yet ready to come clean. They considered utilizing the Voluntary Disclosure Program offered in 2009, but couldn't bring themselves to do it. Some being elderly, some being afraid of the bad publicity or the loss of their social status, they figured perhaps they can live out the rest of their lives without being caught.
What this category of taxpayer doesn't realize is the problem they are passing on to their heirs. With the need to reduce the national debt, even if the administration changes in 2012, the efforts of the IRS will continue. And with the continued erosion of banking secrecy, such taxpayers and their offshore financial accounts and entities will be found. Voluntary disclosure can avoid the criminal prosecution of these taxpayers and still allow them to have an estate to pass on to their children instead of passing on to a major legal problem.
Taxpayers with foreign accounts can maintain their accounts by making them tax-compliant. Their assets can be protected against creditors once the IRS assesses their penalties for past failures to report income and their foreign accounts and other informational reporting requirements. The past may not look so great, but the future can be vastly improved and the stress that keeps these taxpayers up at night that is seriously damaging their health can be eliminated.
In compliance with IRS requirements, we must advise you that any U.S. federal tax advice contained in this informational article is not intended to be used nor is it published in order for it to be used and you may not use it for the purpose of avoiding FBAR and other IRS penalties or fines under the Internal Revenue Code. It is not intended to be used nor is it being published in order to promote, market or recommend any specific transaction, tax-related matter or estate planning tax scheme to any party.