Whether you have chosen to hide your account willingly or failed to file an FBAR by mistake, you may not know the full ramifications of your activities or your best course of action now. If you haven’t heard the horror stories yet, you’re about to have a couple to remember. For those who have kept an offshore account secret, there are three options: quiet disclosure, OVDP, or the streamlined offshore procedures. Some may even feel they have a fourth option: keeping the account a secret. The average person may have a hard time deciding what course of action they should take. It may not seem to matter much, but Charles Rettig gives us two frightening examples in his articles, “Jury Determines 150-Percent FBAR Penalty” and “U.S. Seeks FBAR Related Forfeiture of $12 Million!” These stories teach an important lesson, but first, let’s discuss proper offshore account disclosure.

Who Needs to Disclose an Offshore Account?

U.S. Policy requires anyone with an offshore account to report it on their 1040 when they file their income taxes. If that account has a balance of over $10,000 they must also file an FBAR, or Foreign Bank Account Report. Failing to do so can have severe penalties depending on whether your failure to report was accidental or willful, as well as a few other factors.

Losing at Russian Roulette

I’m sure you know the results if you lose the actual game of Russian roulette. When you don’t handle the disclosure of your offshore account to the IRS properly, you might not be putting your life at risk, but you’re still playing a high-stakes game. Rather than putting your life on the line, you’re putting your financial security and your reputation in danger. You’re counting on the IRS not to find you and think your odds are good. Many find out just how dangerous this game really ism like the men in the following two cases.

C.W. Zwerner

At the age of 87 years old, Zwerner decided to come clean about an offshore account he had been holding for a number of years. The maximum balance on this account was $1,691,054. His counsel spoke to the IRS on his behalf, keeping his name confidential. However, Zwerner made one fatal error that would later cost him $3,488,609.33. He filed a quiet disclosure hoping to get a slap on the wrist, but this type of disclosure is intended for a different type of case. After an audit brought his actions to light, he was found by a jury to have willfully hid his offshore account. The result: Zwerner became responsible for 1.5 times the balance of the account. He was penalized and required to surrender 50% of the balance of his accounts over the 4 years in which he had willfully hidden them.

What could he have done differently? If Zwerner had applied to the Offshore Voluntary Disclosure Program (OVDP), his penalties would have been capped at 27.5% of the highest year’s maximum aggregate account balance during the disclosure period (i.e., the most recent eight tax years for which the due date had already passed). This means that at worst, he would have paid $807,934.05 in penalties. Had he chosen this path, he would still have had money in his account rather than paying off a debt for the rest of his and his family’s lives.

U.S.A. vs. Approximately $12,000,000 in United States Currency

In another case known as U.S.A. vs. Approximately $12,000,000 in United States Currency, yet another man with an offshore account faced the consequences of his decisions. He chose to play a different game of Russian roulette. He trusted the IRS wouldn’t discover his offshore account, which he had failed to disclose. Both he and his father worked together moving the balance of his account from an offshore account that was under investigation to a “safer” New York account. Nonetheless, he was discovered and was fined over 12 million dollars. The large amount of cash hidden offshore led to much larger penalties in this case when compared to Zwerner, resulting in the loss of the balance of his account.

What would have been this taxpayer’s best course of action? Once again, he should have filed for OVDP. His penalties would have been a maximum of $3,300,000. He would have also been guaranteed immunity from criminal prosecution.

So do you like to gamble? Are you ready to play Russian roulette with the IRS, or would you rather find the safest path for your situation and save yourself steep penalties?

Determining Your Best Course of Action

There are a few factors that determine what your best option will be. For starters, there are low risk and high risk cases. Factors that may show willful behavior will determine if your case is high or low risk, as well as the balance on your account. A willful case is always high risk and should be handled through OVDP. In cases where nondisclosure was nonwillful, there are two options: (1) quiet disclosure and (2) the streamlined offshore procedures. Quiet disclosure is best for low risk cases. You should choose which course of action is best for your case and not the one with the lowest penalties.

The knee-jerk response might be to make a quiet disclosure, but clearly you can end up worse off, as the case of Zwerner shows us. Again I ask, are you a gambler? Are you really willing to take a chance that you won’t get caught and end up paying more than the balance of your account? You really need to consider whether the potential benefits outweigh the risks.

When deciding which option is best for you, always seek advice from someone knowledgeable in tax law. A tax lawyer can help you assess your risk and determine which course of action has the lowest risk. While you can’t always predict which course of action will have the lowest penalties, you can avoid options that will be more likely to incur catastrophic results. Talk to a tax defense lawyer today to get started.

Original Post By:  Michael DeBlis