Many offshore investors have failed to comply with requirements  that they alert the U.S. government to their offshore funds, including requirements to file an annual Report of Foreign Bank and Financial Accounts. The U.S. government has been aggressively cracking down on these investors in recent years, including entering into deals with foreign banks whereby those foreign financial institutions turn over information on accountholders in exchange for avoiding prosecution for facilitating tax evasion.

Many foreign financial institutions have made the decision to cooperate with the government of the United States in the government's tax-evasion investigations. Foreign banks have participated in a Swiss Bank Program, which allows them to come forward to disclose the ways in which they facilitated tax evasion. When these banks pay a fine and offer the U.S. government information on accountholders, the banks can avoid criminal prosecution. Financial institutions have also entered into similar deals with the U.S. outside of this formal amnesty program, protecting themselves from harsh penalties by turning over the information the IRS and Department of Justice need to investigate individual taxpayers.

When 11.5 million files leaked from a prominent Panama-based law firm, the leaked files revealed the secret ownership of confidential offshore accounts by a number of wealthy individuals. While having offshore accounts is not, by itself, unlawful, many of the holders of these offshore accounts were not in compliance with tax laws.  Failing to report offshore accounts and not paying taxes on investment income held in offshore accounts can have serious consequences.

The use of offshore bank accounts has long been a common tactic by investors who want to keep some of their wealth private and who may not want the IRS to know about every asset they own.  In recent years, however, countries nationwide have been cracking down on the practice of offshore banking as a method of tax evasion or tax avoidance. This has made it difficult or impossible to keep offshore accounts private and to ensure the accounts do not come to the attention of taxing authorities.

If you have undeclared financial accounts offshore, you have probably heard of the Offshore Voluntary Disclosure Program (OVDP) and you may have considered taking part in the program. Since OVDP started in 2009 to allow people who did not file a Report of Foreign Bank and Financial Account to come forward and report their accounts-- while minimizing penalties-- more than $9.9 billion in taxes, interest, and penalties has been paid by more than 55,800 OVDP participants. May have chosen to participate in the OVDP because penalties can otherwise be draconian for undeclared offshore accounts, with some taxpayers facing penalties of 150 percent of the account balance.