Overseas Bank Sting Ensnares Average Joes

BOSTON ( TheStreet) -- The good news: The Internal Revenue Service extended the voluntary-disclosure deadline for Americans with bank accounts in foreign countries.

The bad news: Not only high-rolling tax cheats need to worry about the government's crackdown, which strong-armed Swiss bank UBS ( UBS) to turn over 4,450 of U.S. customers' names. About 3,000 so-called offshore-banking clients have voluntarily come forward to amend their tax returns and seek reduced penalties. The amnesty program now will end Oct. 15 instead of the end of September.

Switzerland is the largest offshore center, accounting for $1.8 trillion, or 28%, of money kept outside of investors' home countries last year. The U.K. is a close second, while Singapore, Hong Kong, Panama, Canada and Venezuela are gaining in popularity as alternatives to U.S. asset managers such as State Street ( STT), Fidelity Investments, Vanguard ( VTI) and JPMorgan Chase ( JPM). The U.S., whose debt has quadrupled, in part, because of bailouts of the banking, housing and car industries, loses almost $100 billion a year in income because of offshore tax dodgers. Americans may otherwise legally keep cash and investments in foreign countries.

"In Texas, we have a lot of people who have timeshares in Mexico, and they have bank accounts for those timeshares' expenses," says Charles Meadows, a tax-litigation attorney for the Dallas law firm Meadows, Collier, Reed, Cousins & Blau. Average Americans like those may potentially be targets of a U.S. investigation, he says, even though people with a second home "never treated those accounts as anything other than a petty-cash fund to pay the operating expenses."

Brian Compton, president of Encino, Calif.-based Tax Resolution Services, says Americans with accounts overseas must precisely follow the IRS' disclosure guidelines. Though Swiss accounts are in the crosshairs, the same advice applies to anyone with an offshore account.

"The first misconception is, 'Gee, you must be a wealthy jet-setter," he says. "But these accounts could be for Holocaust reparations. It could be you had a job overseas or you married a spouse from another country who has funds there. We spoke to someone who was a model and worked in Japan and Europe, and the funds were deposited in the local bank" for convenience.

Failure to take advantage of the amnesty program could prove disastrous, Compton says. A $1 million account could accrue $2.5 million in penalties.

But the trouble doesn't end with fines. Filing a false tax return is punishable by up to three years in prison. Tax evasion carries a five-year sentence. Failure to file a report that gives details of a foreign bank's name and the amount of an account holder's assets is punishable by a 10-year sentence.

Voluntary disclosure may not be enough. If someone's name is among those handed over by UBS or if the account has been flagged by the IRS for investigation, the amnesty program no longer applies.

"Is there a threshold where you have a greater likelihood of no prosecution? The IRS isn't telegraphing that," Compton says.