The Tax Preparation Consequences of Failing to Disclose Offshore Accounts

October 25, 2011 by  Filed under: Taxes 

Competent tax return preparers should take care to not perpetuate taxpayer negligence in making required disclosures to the IRS. When professionals with Registered Tax Return Preparer certification learn of offshore accounts, they are required by tax preparer ethics to assist taxpayers in properly reporting the assets. Doing so is mandatory regardless of potential taxpayer penalties from not making disclosure in the past.

The IRS recently ended its Offshore Voluntary Disclosure Initiative for 2011, when approximately 12,000 people reportedly came forward. About 15,000 taxpayers participated in a similar program two years ago. Both programs brought in a total of $2.7 billion. By disclosing foreign taxable assets, individuals encountered reduced penalties and a waiver of criminal charges.

A tax preparation business that encounters someone with money in foreign bank accounts or other financial instruments should demand an immediate disclosure to the IRS. Individuals who continue holding offshore investments are expecting that the IRS will not catch them. That is an unlikely result based upon escalation of IRS enforcement in this area.

Even taxpayers who are not intentionally evading taxes face stiff penalties for failure to disclose foreign accounts. If a taxpayer claims that lack of disclosure had no tax consequence, the IRS considers this a frivolous position. The penalties for a frivolous tax position are a 20 percent accuracy penalty and a 75 percent civil fraud penalty. Consequently, disclosure of an overseas account is just as serious as any other frivolous positions encountered in tax preparer work.

More importantly, anyone hiding taxable offshore assets risks being accused of criminal conduct. The number of fraud cases investigated by the Criminal Investigation Division of the IRS increased by 14 percent to 4,706 in the last government fiscal year. The number of fraud convictions was 4 percent higher.

A recent report by the Treasury Inspector General for Tax Administration stated that the Criminal Investigation Division reduced its average investigation time per case to 365 days in 2010 compared to 401 days in 2009. This means that the division’s same 2,752 agents are performing work at an 8.8 percent faster pace. Legal source tax investigation initiations increased by 12.3 percent. The conviction rate rose by 6.9 percent.

More investigations and a higher number of convictions are not good signs for anyone evading reporting responsibilities with the IRS. The Treasury Inspector General for Tax Administration commented that other IRS divisions helped identify cases for fraud investigation. Therefore, an important tax preparation measure is to remind taxpayers about reporting to the IRS any foreign bank accounts or financial securities held overseas.

IRS Circular 230 Disclosure

Pursuant to the requirements of the Internal Revenue Service Circular 230, we inform you that, to the extent any advice relating to a Federal tax issue is contained in this communication, including in any attachments, it was not written or intended to be used, and cannot be used, for the purpose of (a) avoiding any tax related penalties that may be imposed on you or any other person under the Internal Revenue Code, or (b) promoting, marketing or recommending to another person any transaction or matter addressed in this communication.

Fast Forward Academy is a leading publisher of education for tax return preparers and tax professionals. Access to free questions for the Registered Tax Return Preparer certification is available on their website.

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