U.S. taxpayers with undisclosed assets offshore may enter the Offshore Voluntary Disclosure Program (the “OVDP”) being administered by the Internal Revenue Service. Among other penalties and interest on unpaid income tax, taxpayers entering this program are generally subject to a miscellaneous offshore penalty of 27.5% of the highest value of their undisclosed assets held offshore during the previous 8 years, including non-financial assets such as real estate and art.
However, pursuant to FAQ 1.1 of the OVDP, a 50% offshore penalty applies (in lieu of the 27.5% penalty) when a taxpayer has an account at certain specified foreign financial institutions, or if the taxpayer established an account with certain facilitators. Specifically, the 50% penalty will apply if a taxpayer has or had an account with a foreign financial institution, or used the services of a “facilitator”, if the institution or facilitator has been publicly identified as being under investigation or as cooperating with a government investigation.
The IRS publishes a list of such financial institutions and facilitators at the following link:
As of August 20, 2015, over 40 banks and facilitators are now on this list, including over 30 Swiss banks, as well as Bank of Butterfield in Bermuda and HSBC India among others.
In addition to providing information about current U.S. account holders, the cooperating banks and facilitators are likely disclosing information regarding accounts that had been previously closed and transferred to other banks.
Once the 50% penalty applies, it will apply to all of the taxpayer’s undisclosed offshore assets, not just the account at the identified institution. Taxpayers that have acted willfully and are caught by the IRS prior to entering the OVDP are increasingly being subjected to criminal prosecution, especially where the amount of the unreported balances and income tax evaded are significant. Therefore, if a taxpayer had or still has an undisclosed account at one of the institutions on the list, they should enter the OVDP as soon as possible.
As we have previously discussed, there are foreign account compliance alternatives to the OVDP for taxpayers that did not act willfully to avoid reporting and taxation.
Please contact us to speak to Robert Ladislaw or William Blum with any inquiries.