US offers second tax amnesty

Tax attorney: US citizens with undeclared offshore accounts should come forward

US taxpayers who maintain undeclared offshore accounts will get another opportunity to disclose them to US authorities without facing criminal prosecution, the Internal Revenue Service announced last week.

The 2011 Offshore Voluntary Disclosure Initiative will be available until 31 August, 2011.

It requires taxpayers to pay up to 25 per cent of the highest annual aggregate account balance from 2003 through 2010, plus back taxes, interest and other tax penalties for those years.

According to the IRS, the failure to disclose offshore accounts and filing false tax returns are criminal offences that carry prison terms and fines of up to $500,000.

IRS Commissioner Douglas Shulman said it would give “people a chance to come clean before we find them”. He added that IRS investigations of overseas banks are “quite advanced”.

Miami-based tax attorney Steven Cantor of Cantor Webb recommends US citizens, who maintain undeclared accounts in Cayman, should come forward under the initiative.

A frequent speaker in Cayman and other countries in the Caribbean, Mr. Cantor insists that his message when speaking at Cayman Finance or STEP events has always been consistent in that US citizens need to declare their foreign income and bank accounts and, when available, take advantage of the reduced penalties offered by the amnesty initiative.

Although the laws have been on the books for years, a $14 trillion US deficit has led to a more serious enforcement, he argues.

In particular the UBS case has provided US authorities with a treasure trove of data, which they are going to mine, he said.

The new voluntary disclosure initiative follows a similar programme that ended in October 2009 and attracted approximately 15,000 taxpayers who took advantage of avoiding criminal prosecution, by paying taxes for six years of income together with an additional penalty of 20 per cent.

The first 2,000 of those cases are closed now and have generated almost $400 million in tax revenue, Mr. Shulman said.

Additionally, 3,000 taxpayers who declared their offshore accounts after the initial programme ended will be eligible under the new disclosure initiative, albeit under the more stringent 25 per cent penalty.

“People who waited out the 2009 initiative will not be rewarded for waiting,” Mr. Shulman said.

The high profile fraud case built by the US government against Swiss bank UBS, lent some weight to the first IRS disclosure initiative in 2009.

However, other cases, such as former Julius Baer banker Rudolf Elmer, who in January 2011 handed over bank client data to Wikileaks, show that previously confidential bank information may become public.

New reporting requirements for overseas banks, such as the Foreign Account Tax Compliance Act, which comes into effect in Cayman in 2013, and changes to tax treaties continue to provide the US government with more information to investigate undeclared offshore assets.

“As we continue to amass more information and pursue more people internationally, the risk to individuals hiding assets offshore is clearly increasing,” Mr. Shulman warned. “We wanted to give people a chance while we have other banks under our sights.”

Dual citizenship irrelevant

As far as US tax laws are concerned having dual citizenship does not make a difference, Mr. Cantor said, using the term “slightly pregnant” to describe these cases.

“If you are a US citizen it does not matter how many passports you have or where you live,” he said. “The IRS does not care if you open the bank account as a Martian”, if you have a US passport, you will have to report your bank account and income, he said.

The same applies to those US citizens who live and earn income abroad.

Criminal sanctions and penalties for unreported income and undeclared accounts may loom, even if the income earned falls below the taxable income threshold in the US, Mr. Cantor explained. “The foreign earned income exclusion is only available if you file a tax return to claim it.”


US citizens who come clean under the initiative will have to pay taxes due for the period 2003 to 2010 and face several penalties but no criminal prosecution.

In addition to the 25 per cent penalty on the highest annual aggregate balance, holders of undeclared offshore accounts will have to pay, if applicable, a 20 per cent accuracy-related penalty on the total amount of underpaid taxes, a failure-to-file penalty and a failure-to-pay penalty.

Certain tax payers are eligible for reduced penalties, as low as 5 per cent, under the voluntary disclosure programme.

This applies to US citizens who inherited an offshore account, which they have not actively managed.

The new initiative also introduces a 12.5 per cent penalty for those offshore account holders whose account balance never exceeded more than $75,000.

This new penalty will also be extended to taxpayers who came clean under the first voluntary disclosure initiative, which did not initially offer the reduced penalty, according to the IRS.

Taxpayers who are being audited are not able to participate in the programme.

Taxpayers who have made quiet disclosures by amending previously filed tax returns are eligible to apply.

It has always been possible for tax payers to amend their returns for a period of up to six years by paying outstanding taxes plus penalties, but since 2004 all US citizens also have to declare their offshore bank accounts.

The voluntary disclosure initiative encompasses offshore bank accounts as well as foreign investment income.

The new programme allows for the alternative mark-to-market calculation of income from investments in passive foreign investment companies, such as offshore mutual funds and offshore hedge funds.

Those US citizens who decide to take advantage of the OVDI have to be aware that there is not much time to meet the 31 August deadline, said Mr. Cantor, whose law firm counts a number of US citizens in Cayman amongst its clients.

“From our experience people who have lived in a tax haven environment often don’t keep books and records as they would if they lived in an onshore environment. So it takes longer to prepare the tax returns.”

The 31 August deadline requires that all outstanding tax returns have been submitted.

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  1. Disclose what? I wish they dont disclose any offshore account information to them! This is the utmost legalized invasion of peoples privacy I have ever witness! Peoples personal monies and financial accounts to be disclosed ALL IN THE NAME OF TERRORISM and TAXES! What is this world becoming! To rob from the rich is just as immoral to rob from the poor!

  2. 2:36 – Exactly, and btw who robs from the _poor_ really? I want to know this guys business plan. The lets get rick, robbing from the poor plan

    The only one that I know robbing from the poor is the US government via The lottery, AKA poor mans taxes