Foreign Accounts Under Renewed IRS Scrutiny

Foreign accounts under renewed IRS scrutiny

By Gail Liberman Special to the Daily News

Posted: 4:25 p.m. Saturday, Nov. 27, 2010

West Palm Beach tax attorney Michael Lampert recently complained that penalties as high as 50 percent of an account value annually are keeping taxpayers from fessing up to the IRS about foreign financial accounts.

IRS Commissioner Doug Shulman has indicated the IRS could have a second so-called amnesty program for persons who come forward to disclose their foreign accounts. But don’t expect the terms of a new program to be as attractive as the first one, which ended last year. That program, which offered clear penalties to those who came forward, drew some 15,000 voluntary disclosures. Closed cases have averaged more than $200,000 in tax collections per case — including back taxes, interest and penalties.

Shulman’s remarks, while hailing the success of the first IRS program aimed at ferreting out unreported foreign accounts, comes as the IRS targets more bank clients.

“Clients have gotten letters from the Department of Justice indicating they’re targets of a criminal investigation with respect to accounts at HSBC in India,” says Dennis Brager, a Los Angeles tax litigation attorney. Brager’s clients also report that Bank Leumi in Israel has been warning account-holders that unless they agree to U.S. information reporting, their accounts would be closed.

While voluntary disclosure — by contacting an IRS office — may avert criminal prosecution, the IRS has not clarified penalties for doing so. With penalties potentially steep, those who might come forward are reluctant to do so, attorneys say.

Meanwhile, the IRS has withdrawn action against its original target, UBS AG.

“Nevertheless, anybody dealing with foreign anything needs to make sure they tell their tax attorney or accountant,” Lampert warns.

Even if you don’t own a foreign account, but you have power of attorney for a foreign account, or the ability to pick up the phone to send somebody money from one, Lampert says, you must file with the IRS. You also must file if you have an interest in foreign entities, such as a trust or corporation.

Proof of a major crackdown: The IRS has renamed and reshaped its large corporate division into the “Large Business and International Division.”

Foreign countries, also strapped for cash, are coming after their citizens in the United States who owe taxes.

“Germany, based on a treaty, is not afraid to ask the U.S. for information or to do a levy,” Lampert says. “There are a lot of dual citizens and a lot of people earning money — not just in the United States, but in other countries.”

Under U.S. IRS rules, if you are a U.S. citizen or resident alien, you must report income from all sources within and outside the United States. For U.S. citizens or resident aliens, the rules for filing income, estate and gift tax returns and for paying estimated tax are generally the same — regardless of where you live.