You’ve heard it before, “Don’t worry, they can’t touch the money. It’s all in an offshore bank account in the Caiman Islands.” It may sound like just a cheesy explanation from too many movies but it’s actually a real, frustrating problem facing the IRS. And they’re cracking down on offenders.
One of the key principles of US taxation is that American citizens are subject to tax on all income, no matter where you earned it. Makes sense, you’re reaping the benefits from others paying taxes, it only seems fair that everyone contribute the appropriate amount. But every year there are thousands of dishonest taxpayers slipping through the cracks by withholding information about their bank accounts, mutual funds or other financial holdings based in foreign countries. Without this information, it becomes difficult for the IRS to do their job.
Now it may be tempting to cheer this sort of activity on, because let’s be honest, not many of us are fond of the Internal Revenue Service. But let’s think about the situation a little. The Americans getting away with this slippery tactic aren’t your everyday people. Your middle class neighbor isn’t secreting his jacuzzi fund away in a Swiss bank account, it’s companies and members of the upper crust failing to report significantly large sums of capital.
In recent years, the IRS has focused on Swiss accounts held by U.S. citizens (especially through Swiss Bank UBS). The result has been a lot of disgruntled taxpayers coming forward and paying back taxes and the subsequent penalties. And that’s definitely progress, but it’s only the beginning. Experts project the existence of thousands, if not millions of accounts going unreported by U.S. citizens. Meaning a lot of missed revenue isn’t being funneled into neglected public works programs, education and more.
Part of the effort to crack down on tax evasion is the requirement of citizens with more than $10,000 in an offshore account to file a Foreign Bank Account Report (FBAR). The penalty if you choose not to file? The greater of $100,000 or 50% of the account’s highest balance during the year. Ouch. And that’s not all, a portion of those filing an FBAR must also file IRS form 8938, Statement of Specified Foreign Financial Assets.
Basically, the odds of getting away with the old Swiss Bank Account trick are shrinking, and the numbers reflect American’s realizing that. In 2012, U.S. taxpayers filed 671,000 FBARs, up more than 90 percent from 2008.