By Anthony N Verni

As the global economy continues to grow, the tax implications of conducting business outside of the United States and attempts at circumventing tax and financial reporting have not gone unnoticed by the IRS. Certain US taxpayers have engaged, and continue to engage, in international tax avoidance schemes and cross-border transactions, designed to avoid detection by the IRS.

In response, the IRS has developed a Servicewide Approach to International Tax Administration to improve voluntary compliance with the international tax provisions and other reporting requirements. As part of this approach, there is a concerted effort to make better use of these information exchange tools and to coordinate with treaty partners to share information about international tax compliance issues.

The US government has spearheaded a number of initiatives aimed at discovering US taxpayers with undeclared foreign financial accounts as well as indicators of tax evasion, including:

1. Whistleblowers and informants

The IRS Whistleblower Office pays money to people who blow the whistle on persons who fail to pay their required taxes. If the IRS uses information provided by the whistleblower, it can award the whistleblower up to 30% of the additional tax, penalty, and other amounts it collects.

2. Criminal investigation of financial institutions and account holders

Criminal Investigation (CI) serves the American public by investigating potential criminal violations of the Internal Revenue Code and related financial crimes in a manner that the IRS hopes will foster confidence in the tax system and compliance with the law.

3. The Civil Summons Process (John Doe Summons)

Unlike other IRS summonses, a John Doe summons does not list the name of the taxpayer under investigation because the taxpayer is unknown to the IRS. With a normal summons, the IRS seeks information about a specific taxpayer whose identity it knows. In contrast, a John Doe summons allows the IRS to obtain the names of all taxpayers in a certain group.

4. Requests under a tax treaty or mutual information exchange agreement

The US has tax treaties and tax information exchange agreements (TIEAs) with many countries that provide for the exchange of information on tax matters. These agreements are the result of an initiative by the OECD to improve the transparency of financial flows between countries.

5. Voluntary disclosures of US taxpayers seeking to avoid criminal prosecution

The Offshore Voluntary Disclosure Program (OVDP) puts US expat account holders at immediate risk because it requires that foreign financial institutions disclose to the IRS the names and account details of all current and former account holders of expats living abroad or who have offshore accounts. If the IRS can show that an expat had knowledge of FBAR regulations and failed to comply, the person may be subject to severe criminal penalties and fines.

6. FATCA and related legislative and regulatory development

The Foreign Account Tax Compliance Act (FATCA) requires foreign institutions and global banks to identify any US clients with more than $50,000 in their account. The Act requires that foreign financial institutions come clean to the IRS or face, in some cases, a 30% withholding tax on certain US-source payments that are made to them.

A competent tax attorney will guide you through the disclosure process and calculate your tax liabilities and FBAR penalties. In addition, given the potential penalty under the OVDP, it may be ill-advised to enter the Program and make more sense to consider an alternative method of disclosure, which does not include a ‘quiet disclosure.’

Depending upon your particular circumstances, you may want to take advantage of the Program sooner than later, because the IRS can terminate it or redefine its eligibility requirements at any time.

Don’t wait any longer. It is only a matter of time before your accounts are discovered.

Anthony N Verni is an attorney and certified public accountant, founder of Verni Tax Law.

For more information please go to www.vernitaxlaw.com