For years, new clients (and some of our current ones) have been asking why they should bother fixing their prior US tax filings to report previously unreported foreign income or foreign assets. The most common question is “How will the IRS ever know?”
Years ago, this was a fair question. Now, less so.
What changed? Why is the risk so much higher now?
In recent years, the IRS has been amassing a wealth of tools and data that allow it to identify US taxpayers who have likely not been fully disclosing their overseas items. As a result, taxpayers now run a much higher risk of the IRS uncovering their current and past under-reporting. They remain non-compliant at their own peril.
In the past ten years, the following developments have strengthened the IRS’s ability to identify US taxpayers with foreign assets:
- Beginning in 2009, Swiss (and other foreign) banks entered into agreements with the US Department of Justice (DOJ) to “tattle on” US clients.
Swiss bank secrecy was shattered in 2009, when the DOJ announced that UBS entered into a Deferred Prosecution Agreement (DPA) related to the concealment of US taxpayer foreign financial assets and income. Since 2013, under the Swiss Bank Program, 82 foreign banks have entered into Non-Prosecution Agreements (NPAs) with the DOJ where, in exchange for lower fines and penalties on the banks, they provide details on US taxpayers with foreign financial assets and income. Switzerland was just the first country targeted by the DOJ’s Offshore Compliance Initiative. Since then, numerous other banks in former tax havens have negotiated similar arrangements.
- The IRS has amassed data from 10 years’ worth of IRS offshore amnesty programs, which it can now analyze and mine to identify other non-compliant individuals.
US taxpayers are required to report their worldwide income and foreign financial assets annually on their tax returns and on international informational reports, such as FinCEN Form 114 (FBAR), Form 8938, etc. For taxpayers who failed to report these assets and/or associated income, the IRS offered multiple “amnesty” programs between 2009 and now that allow taxpayers to voluntarily come forward in exchange for lower penalties. The IRS estimates that more than 121,000 taxpayers have come forward and paid a total of $11.1 billion in back taxes, interest, and penalties. In addition, 1,545 taxpayers have been criminally indicted for tax crimes related to foreign financial asset disclosure.
Now, the IRS has consolidated the data (and lessons learned) from these programs and is running analytics to identify likely non-compliant individuals.
- FATCA goes into full effect at the end of 2019, and numerous countries are sharing information on US taxpayers’ ownership of foreign accounts and assets.
When the Foreign Account Tax Compliance Act (FATCA) was enacted in 2010, it required other countries to report to the IRS on US taxpayer ownership of bank and financial accounts abroad. Initially, this raised questions. Would other countries comply? How would the US enforce the Act?
It turns out, these concerns were unfounded. Many countries have agreed to comply—in part to preserve trade relationships with the US, and in part because they want the US to share information on their residents, as well. The information flows both ways. In fact, since FATCA, other countries have enacted similar measures to share taxpayer account information across borders, including the Common Reporting Standard (CRS) in Europe.
Although FATCA was phased in over several years and was meant to be fully in force in 2016, the US has granted waivers to allow foreign banks additional time to comply. Those waivers are set to expire at the end of 2019.
The IRS warns it’s coming for you
Interestingly, the IRS often issues warnings to alert US taxpayers where the IRS plans to focus its attention and audits next.
In 2018, it announced several campaigns focused on FATCA compliance and other international matters. Then, on April 16, 2019, the IRS announced the Offshore Private Banking Campaign (OPB). In doing so, it put taxpayers on notice that the IRS will actively review and match foreign financial asset and income information against annually filed tax returns and international informational reports, especially related to offshore private banks.
You can use IRS amnesty programs so long as the IRS doesn’t find you first
The IRS makes certain amnesty programs available, which allow US taxpayers to fix their prior under-reporting of foreign income and assets, under better terms and reduced penalties. But, to qualify for these programs, you have to come forward voluntarily before the IRS has you on its radar. Once the IRS targets you for audit (or discovers that you are a client of a foreign bank that is on the IRS’s “bad” list), then you can’t use the programs.
IRS amnesty programs come and go. The IRS reserves the right to terminate the programs at any time. Right now, certain programs are available, but the programs for the most egregious offenses have closed (or become more difficult to use).
What to do if you have unreported (or incorrectly reported) foreign assets and income
If you have unresolved compliance issues, it’s generally in your best interest to immediately take steps to voluntarily resolve the issues through one of the remaining IRS amnesty programs. If you previously used an amnesty program, such as a Streamlined Filing, but did not fully report all assets or income, you should have your previous filings reviewed to determine if an amended streamlined filing is required.
If you find yourself asking “How will the IRS ever know,” we urge you to rethink that question. We are international tax professionals and we can help. Contact us to schedule a consultation.