The federal amnesty deadline for declaring foreign accounts to the IRS expired October 15th. After the highly publicized legal action against Swiss bank UBS began, the IRS offered an amnesty to Americans with assets in foreign accounts. According to federal money laundering laws and IRS regulations, businesses and individuals holding more than $10,000 in offshore accounts are required to complete an annual Foreign Bank Accounting Report (FBAR). Having offshore bank accounts and foreign hedge funds isn’t illegal but failure to disclose them is.

The UBS suit alone revealed that an estimated 52,000 Americans were holding funds at UBS. Many, if not most, of those accounts were not properly reported. Add the thousands of other foreign banks and the number of Americans holding offshore assets is staggering.

Note that many foreign banks are in countries that cooperate and exchange information with the IRS. And many other Americans simply voluntarily report their holdings. According to government estimates, however, many don’t leading to billions of dollars in unreported income.

Enter the Obama administration, the IRS and the much publicized amnesty. Before discussing the dismal “success” of the program, a bit more background is necessary.

In an effort to close the tax gap (difference between what the government claims is owed versus what is actually reported and collected), the government utilized a “carrot and stick” approach.

First, the government began several highly publicized criminal prosecutions of Americans with unreported foreign income. Several prosecutions were tied to UBS bank accounts. And the federal judiciary responded with stiff jail sentences. That’s the stick to get tax payers to voluntarily comply.

At the same that time the IRS had turned up its media campaign, world leaders increased the pressure on the so-called “tax haven” jurisdictions. Switzerland, Liechtenstein, Monaco and several Caribbean basin nations were all subjected to intense media, political and financial pressure to sign tax exchange agreements with the IRS and other taxing authorities. That’s the stick to get other countries to comply with the United States and the G20 nations.

The carrot offered by the IRS was an amnesty program. Come into compliance and file FBARs by October 15th and avoid potential prosecution and prison. Did it work?

The government says yes. In fact, some 7,500 taxpayers came forward and reported foreign accounts and hedge funds. One taxpayer apparently came clean on over $100,000,000 in unreported foreign holdings.

Lawyers and finance professionals believe that 7,500 figure is just a minute fraction of the total number of taxpayers with unreported foreign accounts.

The Treasury Department will undoubtedly turn up the heat and begin additional prosecutions for those that still have not complied. But the total combined efforts of the IRS, Department of Justice Tax Division and the U.S. Attorneys’ Offices can perhaps prosecute 1000 people and businesses per year. And don’t forget that of that 1000, the government still has conventional tax cheats, so called “tax defiers”, money launders connected to drug traffickers, mortgage fraud, malfeasant Wall Street traders and organized crime tax cases to prosecute.

So what does this mean? In my opinion, many people remain on the fence. Five or six UBS prosecutions wasn’t enough to convince people to comply with the law. And many others feel it is wrong that simply failing to report money kept in a foreign bank or earned overseas is a crime in the U.S.

For many of these people, the gambling has begun. Will I get caught? What are the chances of getting caught? And what will happen if I do get caught?

Whether you agree with the law or not, everyone agrees that the unprecedented number of banks and countries coming into compliance with the G20 and OECD mandates this year means that the chances of getting caught are much higher.

For many countries, not paying taxes is not a crime. It is illegal and may subject you to penalties and loss of assets but not jail. The law in the U.S., however, criminalizes failing to report or pay. Our criminal money laundering statutes are quite broad too.

FBARs or the steel bars of a jail cell? That question will play out in the months and years ahead.

###

MahanyLaw assists customers across the United States with tax compliance issues and aggressive white collar and criminal tax defense. From our offices in Milwaukee, California and Portland, we can help you assess your risks, come into compliance or defend you if you are charged with money laundering, being a non-filer, tax evasion, filing false returns, fraud or conspiracy to defraud the United States.

In our experience, there is still time to avoid potential prosecution even though the amnesty has expired but that time usually runs out if the IRS makes first contact with you.