Offshore Accounts Make IRS Dirty Dozen, Again

Every year, the Internal Revenue Service (IRS) lists its "Dirty Dozen" — those behaviors that they say are the worst tax scams of the year. Offshore accounts have made the list again. But with proper reporting, there is nothing illegal about keeping money oversees.

2017 IRS Dirty Dozen List

In February 2017, The IRS released its annual "Dirty Dozen" list. The summary highlights schemes that U.S. taxpayers may experience throughout the year, and particularly during tax season. The list includes:

1. Unreported offshore accounts
2. Frivolous tax arguments
3. Abuse of tax shelters
4. Falsifying income
5. Falsely padding tax deductions
6. Claiming excessive business credits
7. Inflating refund claims
8. Taking deductions for fake charities
9. Tax return preparer fraud
10. Identity theft
11. Phone scams
12. Phishing

Many of these schemes take advantage of U.S. taxpayers, making them the victim of unlawful financial practices. Others are "scams" committed by taxpayers seeking to avoid paying federally required taxes.

The Offshore Accounts “scam” has made the IRS Dirty Dozen list every year for at least the past ten years. The IRS continues to consider unreported foreign income or assets a priority, and will quickly investigate reports of undisclosed offshore accounts. In a statement released February 16, 2017, IRS Commissioner John Koskinen said:

Offshore compliance remains a top IRS priority. We've collected $10 billion in back taxes in recent years with 100,000 taxpayers making use of our voluntary disclosure programs. . . . The IRS receives more foreign account information each year, making it harder to hide income offshore. I urge taxpayers with international tax issues to come forward and get right with the system.

Mandatory Reporting of Offshore Income

The IRS has the power to gather information from international banks and other financial institutions to track down taxpayers who fail to report foreign financial assets or income. The IRS summarized its position:

Over the years, numerous individuals have been identified as evading U.S. taxes by attempting to hide income in offshore banks, brokerage accounts or nominee entities. Then access the funds using debit cards, credit cards or wire transfers. Others have employed foreign trusts, employee-leasing schemes, private annuities or insurance plans for the same purpose.

There are legitimate reasons to keep money overseas. Some taxpayers receive gifts or inheritance from non-resident relatives. Others maintain business interests in other countries. Still others are required to pay U.S. taxes, even though they spend significant time in other countries. Depending on the size of the financial accounts, any of these situations could result in mandatory reporting of offshore accounts.

The details of mandatory foreign asset disclosure are not well known, even among some tax preparers. Not every non-disclosure is a "scam." Many taxpayers do not realize that they are violating federal law by failing to disclose foreign assets or income.

Voluntary Disclosure Can Avoid Criminal Consequences

The IRS opened the first Offshore Voluntary Disclosure Program (OVDP) in 2009. Since that time, there have been more than 55,800 disclosures resulting in $9.9 billion in taxes, fees, and penalties. Another 48,000 taxpayers have used separate streamlined procedures to meet their federal tax obligations and correct non-willful omissions of federal reports.

The IRS continued to urge U.S. taxpayers to take advantage of these voluntary disclosure programs in late 2016. Taxpayers who come to realize they were required to file Reports of Foreign Bank & Financial Accounts (FBARs) can use these systems to limit their civil penalties and avoid federal criminal charges for tax evasion. Despite rumors to the contrary, the IRS has indicated it will continue these program until further notice, even under the new administration.

The key to these voluntary disclosures, particularly within the context of FBAR filings, is whether the omission was willful, or non-willful. Depending on the circumstances, a finding of non-willful violation could substantially reduce the potential penalties, from $100,000 or 50% of account balances per year, to as little as a one-time $10,000 penalty.

When non-willful errors and omissions happen, an experienced tax attorney can use voluntary disclosure procedures to save taxpayers money and get them back in good standing with the IRS. Taxpayers can avoid getting caught up in the IRS's Dirty Dozen by taking proactive steps, including voluntary reporting, to clear their tax liability and meet the IRS's expectations.

Attorney Joseph R. Viola is a tax attorney in Philadelphia, Pennsylvania with over 30 years experience. If you have questions about reporting offshore income or assets to the IRS, contact Joe Viola to schedule a consultation.