For most people, taxes are relatively straightforward. Not easy, not pleasant. But straightforward. If you have a bank account that earns interest during the year, then at the beginning of the following year your bank sends you a Form 1099-INT reporting the interest that you earned, and sends a copy of that same form to the IRS.
Now there are some people out there who aren’t big fans of the whole “bank sends 1099 to the IRS” regime. Or, in some circumstances they don’t want the IRS to know about where the original money came from at all. Many of these people place their money in banks located in other countries or “offshore” accounts. Since these banks are in foreign countries, they generally do not report interest earned on their accounts to the IRS.
Before going further I want to point out that there are plenty of legitimate reasons to open an offshore account and that most people who do open offshore accounts properly report and pay their tax obligations. But there are some that don’t. UBS has been in the news lately for the 52,000 “secret” accounts that it holds for US taxpayers. How many of them are owned by people who haven’t been properly reporting their income? No one knows.
The IRS and UBS have been wrangling over whether or not UBS will be required to turn over the information to the US government, or whether Swiss Banking laws prohibits it from doing so. People who have these accounts and have not reported their income or paid their taxes are subject to massive civil and criminal penalties and possibly criminal prosecution.
Today, the IRS is offering the carrot instead of the stick. Or maybe just a very sharp carrot. IRS Commissioner Douglas Shulman [no relation] announced that for taxpayers who “voluntarily disclose” their accounts (before the IRS catches them first), the IRS is willing to reduce some of the penalties.
From the Wall Street Journal Article:
In its definition of “voluntary disclosure,” the IRS says taxpayers must come forward before the IRS has been given their name by a third party. However, in a call with reporters, IRS spokesmen said that UBS customers whose names already have been divulged to the IRS may still qualify under the “voluntary disclosure” guidance issued Thursday.Taxpayers who come forward voluntarily will face a 20% penalty on their foreign account assets in the year with the highest account value, down from the current 50% penalty levied on account assets in each year the taxpayer failed to disclose the account.Other penalties continue to apply for people who come forward, including either a failure to file penalty of 25% or an accuracy penalty of 20%. Taxpayers will also be responsible for back taxes and interest going back six years, the IRS said.These rules, in effect for six months, “make sure that those who hid money offshore pay a significant price, but also allow them to avoid criminal prosecution if they come in voluntarily,” Shulman said.
Of course, for the average person who doesn’t have millions in an offshore account, the IRS is just as friendly as ever with regards to penalties imposed.