IRS Cracks Down on Tax Evasion by use of Foreign Banking Institutions
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IRS Cracks Down on Tax Evasion by use of Foreign Banking Institutions
The Internal Revenue Service (IRS) has really started to crack down on Americans trying to evade taxes by stashing money overseas in foreign bank accounts. This is a big deal that has a lot of folks pretty worried about getting caught.
Background – Why People Try to Hide Money Overseas
There’s kinda a few reasons why someone might wanna open up a secret bank account in another country. For some people, they’re just trying to hide money and assets from the IRS so they don’t gotta pay taxes on it. For others, they want to hide money from spouses and business partners during nasty divorces or lawsuits. And then there’s some shady folks who are just trying to launder money from illegal activities like drug dealing or fraud. Whatever the reason, it’s been way too easy in the past for Americans to open up secret accounts in tax havens like Switzerland, the Cayman Islands, and Panama to hide money from the IRS.
How the IRS Has Cracked Down
But over the last few years, the IRS has really started cracking down hard on this stuff. They’ve come up with some new rules, programs, and international agreements that are making it way tougher for Americans to hide money overseas. Here’s some of the big ways they’ve cracked down:
- FATCA – This is a law called the Foreign Account Tax Compliance Act that was passed in 2010. It requires foreign banks to report info on accounts held by U.S. taxpayers to the IRS. So now it’s way harder to just stash money in a Swiss bank account without the IRS finding out.
- Offshore Voluntary Disclosure Programs – The IRS has offered a bunch of voluntary programs where people with secret foreign accounts can come clean by paying back taxes and penalties. It’s supposed to encourage people to disclose accounts before the IRS finds them first. Tons of folks have taken advantage of these programs.
- More Whistleblowers – The IRS has made it more lucrative for bankers and financial advisors to snitch on their tax evading clients. Big rewards have led to more whistleblowers turning people in.
- Data Leaks – Massive leaks of financial data like the Panama Papers and Paradise Papers have exposed the names of tons of people with secret offshore accounts. The IRS can go after the folks named.
- Information Sharing Deals – The U.S. has signed deals with countries like Switzerland to share more banking information. So Swiss banks have to give up data on American account holders to the IRS. No more super secret Swiss accounts.
Penalties for Hiding Foreign Accounts
If you get busted hiding money overseas, the penalties from the IRS can be massive. Like they can really stick it to you. Here’s some of the bad stuff that can happen:
- You gotta pay back taxes on all the unreported offshore income for the last 6 years. This can add up to some pretty hefty bills.
- You get hit with a penalty of up to 50% of the amount of unpaid tax. Ouch!
- There’s also penalties just for not properly reporting the foreign accounts each year. This penalty is $10,000 per account per year. Double ouch!
- In the worst cases, people can face criminal prosecution and jail time for tax evasion. Wesley Snipes actually served over 2 years in prison!
Some Defenses People Try
When the IRS first comes after folks with secret foreign accounts, some try to defend themselves by saying:
- They didn’t know they had to report the foreign accounts. But this usually doesn’t work because the rules aren’t new.
- Someone else like their financial advisor or lawyer was supposed to handle the foreign account reporting. But the taxpayer is ultimately responsible, not their advisor.
- They aren’t hiding money, the accounts were set up for other reasons like asset protection or investing in foreign real estate. But the IRS usually doesn’t buy these excuses.
What To Do If You Have an Unreported Foreign Account
If you happen to have a previously unreported foreign bank account, it’s usually best to come clean before the IRS catches you. Tax experts recommend:
- Hiring an experienced international tax attorney to guide you through the process. Don’t go it alone.
- Entering the IRS’s Offshore Voluntary Disclosure Program. This will allow you to avoid criminal prosecution and may reduce penalties.
- Amending previous tax returns to properly report foreign income. You’ll have to pay back taxes and interest.
- Submitting FBAR reports for the foreign accounts. FBARs disclose the accounts to the Treasury Department.
- Paying any penalties assessed by the IRS. The penalties can be high, but not as bad as if you’re caught.
While the IRS has definitely made life tougher for tax evaders with foreign accounts, there are still options to limit penalties if you voluntarily come clean. But it’s risky business trying to continue hiding offshore money from Uncle Sam. The IRS’s long arm is only getting longer!
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