Now is the Time for California Residents With Foreign Assets to Take Advantage of the IRS’s OVDP
Most nations do not require their citizens to pay income taxes on money earned in another country. The United States, however, is different. Americans who fail to pay the applicable taxes on assets stored in an offshore bank account can face serious financial penalties. Currently, the Internal Revenue Service’s Offshore Voluntary Disclosure Program (OVDP) levies a 27.5 percent penalty for willful noncompliance with the nation’s tax laws. As part of recent changes to the OVDP, U.S. citizens who willfully fail to disclose assets maintained with a foreign financial institution that is publicly identified as being under investigation or cooperating with a U.S. government investigation will be subject to a penalty of one-half of the account’s value beginning on August 4th.
This change to the OVDP will reportedly affect thousands of American clients of more than 100 Swiss financial institutions that are expected to disclose the identities of American account holders in the near future. The disclosure agreement was apparently made in an attempt to avoid prosecution by the U.S. Department of Justice. According to IRS Deputy Commissioner Mike Danilack, the agency is eager to end willful tax evasion and stamp out taxpayer noncompliance. Since 2009, the IRS has reportedly collected about $6.5 billion in unpaid taxes from approximately 45,000 offshore financial account holders through the OVDP.
U.S. taxpayers who hold offshore accounts with a financial institution that submits information to the IRS under the new Foreign Account Tax Compliance Act (FATCA) will also be subject to a steeper nondisclosure penalty under the OVDP. The FATCA not only requires disclosure regarding the foreign bank accounts of Americans, but also allows the U.S. to impose a 30 percent tax withholding on certain offshore payments made to foreign banks that do not share data with the IRS. The new law designed to combat offshore tax evasion is scheduled to go into effect on July 1st.
Recently, the IRS changed the OVDP procedure used to report non-willful violations of the tax code. In an effort to encourage disclosure, penalties under the OVDP for American citizens who did not willfully evade taxes by storing their assets in an offshore account will be much lower than for willful violators. Citizens residing outside of the U.S. who voluntarily comply with the tax code will not be charged an additional penalty. Meanwhile, similarly situated taxpayers residing within the country will be charged a reduced penalty of five percent. IRS Commissioner John Koskinen stated the overall goal of the OVDP program is simply to encourage taxpayer compliance.
Southern California residents who maintain assets in offshore accounts will want to consider using the OVDP to become compliant with the nation’s tax laws. Because the consequences for non-compliance are significant, any minor penalties that may be associated with participating in the OVDP are a small price to pay. If you have questions regarding how to take advantage of the OVDP, you should contact an experienced tax lawyer. William Hartsock has advised many California clients with overseas assets on how to become compliant with current IRS rules. To discuss your situation with Mr. Hartsock, please call (858) 481-4844 or contact him through his website.
IRS Boosts Pressure for Disclosure of Offshore Accounts, by David Voreacos and Richard Rubin, Bloomberg.com
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