September 17, 2009 - Phil Hodgen

Jell-O Shot Number 4 – Why the foreign account amnesty is like buying a car

I do an email newsletter.  Jell-O Shots.  (You can subscribe by going to the main page of our website and signing up there.  Please do!)

Here is the latest one, which is all about the amnesty.

Jell-O Shot Number 4

I wrote this to a lawyer friend (hi, Robin!) who needed to explain stuff to a couple of people, and figured this should be a Jell-O Shot. Lightly edited, here it is.

You’re buying a car

Think of the amnesty program like a car with a set package of options. Take it or leave it, here’s the price. That’s what the amnesty program is. You report the income you didn’t report for 2003 – 2008, and pay the regular tax on that. You pay an extra 20% of that tax as a penalty for being late. And you pay interest on the tax and the 20% late payment penalty.

On top of that you get the Morality Police penalty. You were bad, so you must feel pain. It’s the American way!

This penalty is 20% of the highest balance in the unreported account at any time between 2003 and 2008. This is an arbitrary, made-up penalty by the IRS for the purpose of the amnesty. It bears no relation to the other kit of penalties that the IRS throws at you in the normal day-to-day life.

If you pay all of that, you are guaranteed no criminal tax prosecution, and you are guaranteed that the IRS will turn a blind eye to anything that happened before 2003.

But I like that car over there!

Ah, but what if you say to that car salesman “I don’t want the sunroof, so let’s look at other cars on the lot.” Yes, the IRS has other cars on the lot — other ways to resolve your problems with unreported offshore bank accounts and unreported income.

Here you are looking at the normal kit of penalties that the IRS can throw at people who don’t report income on their tax returns. Figure that tax is tax — no matter whether you go with the amnesty process or the “regular” route, the tax liability will be the same. Interest will be charged — the IRS can’t waive that. And you’re going to have a late payment penalty or something like that, and a 20% hit is probably pretty typical. It’s close enough for science, anyway.
Which car do I buy?

So the only real difference you face, if you choose something other than the amnesty, is the Morality Police penalty.

If you don’t buy the amnesty car, the Morality Police penalty consists of as many of the “just file the paperwork and report what you have” penalties as the IRS chooses to throw at you. For sure there is Form TD F 90-22.1, where in most situations the penalty is between $0 and $10,000 per year. Could be more, but that’s the range. If you have shares in a foreign corporation, there is Form 5471. Don’t file it? $10,000. There is Form 3520 for foreign trusts, and for inheritances or gifts from nonresidents. There are a bunch of other things the IRS can ding you for. I like to call these “foot-fault” penalties, because there is no tax due for these forms, but if — like tennis — you step on the line, you lose. [Hey, Metaphor Boy, you’re losing your readers. Ed.]

Exactly what you face for total penalties — if you choose against the amnesty — will depend on your particular situation. There will be two answers here: what you theoretically face (answer = doom), and what you should expect in real life in a typical audit.

You don’t have to take the amnesty

People have a common misperception that they are locked into paying the “20% of high balance” penalty no matter what they do. Not so. There are other ways to go. As a general principle, normal people with normal lives will probably get a better result by NOT selecting the amnesty answer.

What to do?

Take action before 23 September 2009. That’s what. I won’t be bugging you about this stuff anymore. But call me if you want to know more. Mobile +1-626-437-2500.

Speeches, Publications, and Events Voluntary Disclosure