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If you are a regular reader of this blog, you know that the IRS has an amnesty program right now for American taxpayers holding undeclared offshore bank accounts. The amnesty, which is being offered through August 31st, allows people with undeclared accounts to come forward voluntarily, in exchange for which they can avoid a jail sentence.

The holders of the previously undisclosed accounts will still have to pay back taxes on the earnings in the accounts, as well as interest and penalties. Coming forward means that the penalties will be financial, but will not extend to a loss of freedom.

So, what are the penalties that a taxpayer is likely to face if they take advantage of the amnesty and declare previously unknown offshore accounts? Orange County tax attorneys are good sources for information on exactly which penalties are likely to be imposed.

The consequences that could be faced for undeclared offshore accounts include penalties for:

1. Fraud. Failure to file a tax return, or making an underpayment of tax, can be considered fraud. The penalties are usually 75 percent of the unpaid tax.

2. Failure to file a tax return. If no return was filed, there is a penalty of 5 percent on the tax due, plus another 5 percent for each month that the return goes unfiled, up to a maximum of 25 percent of the unpaid tax.

3. Failure to file Form 3520-A. This form, entitled Information Return of Foreign Trust With a U.S. Owner, is for reporting ownership interests in foreign trusts. Any American taxpayer must declare ownership interests in foreign trusts. The penalty for failure to report this is 5 percent of the value of the trust assets owned by the U.S. taxpayer.

In the next post, we will discuss additional penalties.

Source: Fox Business “IRS Announces Amnesty Program for Holders of Offshore Accounts” 7/7/2011