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Offshore account disclosure: watch out for penalties

Constant vigilance! This is the watchword of Mad-Eye Moody, one of the colorful characters in the famous Harry Potter series. It's also a good watchword for U.S. taxpayers with foreign accounts. Constant vigilance is required for such taxpayers because the IRS keeps making changes in how it regulates offshore accounts.

The latest change concerns penalties for taxpayers who opt out of the offshore voluntary disclosure program (OVDP). In a webcast last week, an IRS official said that all possible penalties are back on the table.

To be sure, such penalties never really went away. But in recent years the IRS has offered various forms of partial amnesty to taxpayers who had failed to report foreign accounts, in exchange for disclosure of those accounts and payment of reduced penalties. All along, however, the agency has remained committed to cracking down on what it apparently perceives as tax evasion.

The latest wrinkle in the offshore disclosure story concerns "opting out" of the OVDP program. The 2012 version of the program allows for this. It enables taxpayers who have not fully disclosed foreign accounts due to reasonable cause to enter the OVDP but then opt out to go through the regular audit process. The potential advantage of this for the taxpayer is paying less tax and facing less severe penalties than under OVDP.

It is here, however, where vigilance and a prudent tax strategy are so essential. Is it really preferable to opt out, especially when IRS officials are saying all penalties are back on the table?

Opting out also invites a prolonged process before a case is resolved. On average, it could take 250 days more to finalize the resolution of a case through the opt-out route. The wait may be worth it, however, depending on the other factors involved. The advice of an experienced tax attorney can help a vigilant taxpayer make a sound decision.

Source: "Guess Who Just Defriended IRS Amnesty?" Forbes, Robert W. Wood, 1-22-13

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