BAD NEWS GOOD NEWS
The Bad News is if the government finds out about these accounts before you try to comply with the law, you may be unable to mitigate some of the penalties which could be very high, $10,000 per account, per year, for just non-willful violations even if there is no unreported income. If the government believes they can prove that the failure to disclose the account was done on purpose, they can make your life miserable for years trying to defend yourself against a lengthy audit, additional penalties and by incurring legal expenses.
The Good News is the IRS has a program under which taxpayers who can meet certain conditions can voluntarily come forward and either simply file the delinquent forms straightaway (the Streamlined program), where the taxpayer has merely been negligent about keeping abreast of the changes. Alternatively, even if the failure to comply was done on purpose (or willfully), a taxpayer can work directly with the IRS to get compliant and pay a larger fine. Fines under current disclosure procedures range from zero or as low as 5% or as high as 50% in willful situations.
The IRS is keeping a list of some “bad banks” throughout the world who have been giving them trouble, in which case the OVDP penalty increases from 27.5% to 50% of the balances in the accounts. Nevertheless, even if your conduct was willful, if you qualify for the second program, the Offshore Voluntary Disclosure Program, the IRS is not likely to start a criminal investigation against you or even recommend a 75% civil fraud penalty for failure to file or for filing a false tax return by not including interest earned in the foreign account or investment.
WHY YOU SHOULD DO SOMETHING ABOUT THIS NOW
Parts of this program have been around since 2009, so in some cases the IRS may take the position that it is becoming a little late to say you “just learned about” these filing requirements, especially if the behavior looks purposeful.
Second, if you should die before this is resolved you could be saddling your family and heirs with tax, legal and accounting problems which could go on for years and consume enormous fees by tax professionals thus diminishing your intended bequests to your loved ones.
Next, these new banking rules were written to search out first, hidden accounts which are still open. Shortly, the rules require the banks to search their records for prior years even if the account is now closed.