Many Americans keep assets in bank accounts in other countries. In and of itself, this practice is completely legal. However, the IRS does require all taxpayers to disclose their offshore accounts, primarily out of a concern that people will use foreign bank accounts as a way to skirt responsibility for paying U.S. taxes. Failing to disclose offshore accounts is a serious offense that can result in criminal charges and hefty financial penalties.
In 2009, the IRS started a program that allows taxpayers with undisclosed offshore accounts to come into compliance and avoid criminal charges. In exchange for amnesty from criminal charges, participants in the Offshore Voluntary Disclosure Program are required to file amended tax returns and must pay back taxes, interest and penalty charges.
Not everyone qualifies for OVDP. Taxpayers who have an interest in the program work with a tax attorney, who sends an inquiry to the IRS. The IRS then responds with acceptance or rejection. Taxpayers who are accepted into the program work with their attorneys to begin the process of disclosing their previously unreported offshore bank accounts.
Taxpayers generally will not be allowed into ODVP if they are already under investigation by the IRS or if their name appears on a list of people suspected of having illicit foreign accounts.
Some Israeli account holders disqualified
Unfortunately, it appears that not all taxpayers can count on the protection that comes with acceptance into the program. In early March, the IRS notified tax attorneys that some taxpayers who had been accepted into OVDP were now being disqualified.
The disqualified taxpayers had accounts at Bank Leumi le-Israel, the largest bank in Israel. As of early April, the IRS had not made a public statement about why the rescissions were issued. However, some attorneys whose clients were affected speculated that the IRS may have made an administrative error that resulted in taxpayers being mistakenly admitted into the program when they were already under investigation.
The disqualifications came as U.S. authorities launched an investigation into the bank, alleging that it enabled tax evasion by American taxpayers. A similar investigation into Swiss Bank UBS AG resulted in the bank's agreement to pay $780 million in penalties, fines and restitution. The bank also agreed to help the U.S. government prosecute suspected tax evaders.
Working with an experienced tax attorney
Since the issues surrounding offshore tax compliance are so complex, anyone with an undisclosed foreign bank account would be wise to consult with an experienced tax attorney before taking action. The attorney will be able to evaluate the unique circumstances of the taxpayer's individual case to advise on the best options for moving forward.