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Taxpayer advocate criticizes IRS penalties for offshore accounts

Over the last several weeks we have written multiple posts about the penalties of failing to report overseas accounts to the Internal Revenue Service. We discussed the case of Ty Warner, founder of the once-popular Beanie Babies who was ordered to pay the largest IRS fine related to an offshore account in history, and we discussed the deal the IRS offered to Swiss banks with American clients.

The IRS has set out to make it seem like coming clean with an account is better than being caught and charged with a crime. Through its Voluntary Disclosure Program, the U.S. government has offered lesser penalties to Americans who had been hiding money overseas if they took the initiative to come forward and start reporting it. However, Nina E. Olson, the national taxpayer advocate appointed by Congress, says the penalties for failing to report overseas accounts are too harsh.

For example, if you have a bank account in a foreign country that has more than $10,000 in it, you are required to report it to the IRS, even if you do not owe taxes on it. If you fail to report it, you could be ordered to pay half of what is in the largest overseas account you have. Although the IRS used to allow lesser penalties for those who simply forgot to report their account or didn't know they were supposed to, the government has decided to treat everyone as though they intentionally did not file.

To give you a picture of how unfair this is, those with the smallest overseas accounts -- averaging close to $45,000 -- ended up paying six times their tax burden in penalties. Wealthier citizens paid nearly 400 percent of the taxes they would have owed on their accounts because of the fines and penalties.

One of the major problems with the fines is that many offshore account holders are simply unaware that they have file forms with the IRS. Olson also argues that the penalties for not reporting offshore accounts are much harsher than other IRS penalties. She fears that the fines may ultimately discourage taxpayers from reporting their overseas accounts. It will be interesting to see if the federal government listens to her warnings and adjusts its laws.

Source: CNN Money, "IRS top cop says the agency is too hard on offshore tax dodgers," Lynnley Browning, Jan. 9, 2014

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