United States citizens and resident aliens who maintain offshore financial accounts with assets of $10,000 or more at any time during a calendar year, in addition to reporting and paying income tax on the investment income from these accounts, are required to report the existence of these accounts to the Department of the Treasury by filing Form 90-22.1 on or before June 30, 2009.

As has been widely reported, approximately 52,000 Americans had accounts with UBS AG in Switzerland and it is projected that some 30,000 of these individuals failed to report the investment income earned from these accounts nor did they report the existence of these accounts to the Department of the Treasury by filing Form 90-22.1.

Voluntary Disclosure Programme

In late March 2009 the Internal Revenue Service announced a six-month voluntary disclosure period that will end on September 23, 2009, during which taxpayers have the opportunity to file amended tax returns for the past six years.

According to the Internal Revenue Service "the objective of the new initiative is to bring taxpayers that have used undisclosed foreign accounts and undisclosed foreign entities to avoid or evade tax into compliance with United States tax laws. Additionally, the information gathered from taxpayers making voluntary disclosures under this practice will be used to further the IRS's understanding of how foreign accounts and foreign entities are promoted to United States taxpayers as ways to avoid or evade tax."

Why Should I Make A Voluntary Disclosure?

The Internal Revenue Service has stated that "taxpayers with undisclosed foreign accounts or entities should make a voluntary disclosure because it enables them to become compliant, avoid substantial civil penalties and generally eliminate the risk of criminal prosecution.

"Making a voluntary disclosure also provides the opportunity to calculate, with a reasonable degree of certainty, the total cost of resolving all offshore tax issues.

"Taxpayers who do not submit a voluntary disclosure run the risk of detection by the Internal Revenue Service and the imposition of substantial penalties, including the fraud penalty and foreign information return penalties, and an increased risk of criminal prosecution.

"The Voluntary Disclosure Practice is a longstanding practice of Internal Revenue Service Criminal Investigation of taking timely, accurate, and complete voluntary disclosures into account in deciding whether to recommend to the Department of Justice that a taxpayer be criminally prosecuted.

"It enables non-compliant taxpayers to resolve their tax liabilities and minimise their chances of criminal prosecution. When a taxpayer truthfully, timely, and completely complies with all provisions of the voluntary disclosure practice, the Internal Revenue Service will not recommend criminal prosecution to the Department of Justice."

How Is the Tax, Penalty and Interest Imposed?

Assume the taxpayer is in the 35 percent bracket and deposited $1 million in a foreign account in 2003, earned $50,000 in interest income each year for 6 years that was not reported and had $1.3 million in the account at the end of 2008.

If the taxpayer comes forward and has their voluntary disclosure accepted by the Internal Revenue Service, they would likely pay:

Income tax - $50,000 x 35 percent = $17,500 x 6 years = $105,000

Accuracy penalty - $105,000 x 20 percent = $21,000

Additional penalty - $1.3 million x 20 percent = $260,000

Total - $386,000 plus compounded interest

What If the Individual Does Nothing and Is Caught?

According to the Internal Revenue Service, "if the taxpayer didn't come forward and the Internal Revenue Service discovered their offshore activities, they face up to $2.306 million in tax, accuracy-related penalty, and the Foreign Bank Account Reporting (FBAR) penalty. The taxpayer would also be liable for interest and possibly additional penalties, and an examination could lead to criminal prosecution."

What Is the Threshold for Criminal Prosecution?

According to a criminal attorney the current guideline appears to be that if an individual avoided a total of about $250,000 in income tax over a three-year period and does not enter the voluntary compliance programme, if caught, this individual should expect to spend five to seven years in a US prison, in addition to the aforementioned penalties being imposed.

Commentary

The current administration is actively seeking new sources of revenue and has made the international non-compliance a primary focus of their effort. A deputy commissioner has emphasised in a recent memorandum that offshore cases sent to the field for examination are to have the highest priority.

For those taxpayers who continue to believe that they can continue to hide their offshore accounts from the Internal Revenue Service their condition can best be described as "dire."

Pursuant to the requirements relating to practice before the Internal Revenue Service, any tax advice in this communication is not intended to be used, and cannot be used, for the purpose of (i) avoiding penalties imposed under the United States Internal Revenue Code, or (ii) promoting, marketing or recommending to another person any tax related manner.

The tax advice given by this column is, by necessity, general in nature. You should, of course, check with your own US tax consultant as to how specific transactions affect you since tax advice varies with individual circumstances.

James Paul Sabo, CPA, is the President of ETS Ltd., PO Box HM 1574, Hamilton HM GX, Bermuda. Questions should be sent to: jsabo@expatriatetaxservices.com