Tax lawyers have warned that an end-of-month deadline could place thousands of people in the Cayman Islands in legal jeopardy with US authorities for failing to report local bank accounts.

Under new US tax requirements, anyone with an income from US sources must report their bank accounts to the Internal Revenue Service by the end of August or face a series of fines from Washington’s Internal Revenue Service (IRS).

“The US government is bankrupt and needs the money,” said B.J. Ghatrehee, tax expert in the Dallas, Texas, firm of Kroney Morse Lan, PC.

Struggling with a global recession, two ongoing wars, a trillion-dollar debt and a precarious financial system, the Barack Obama administration has sought revenues from sources previously subject to only modest scrutiny.

“The IRS is offering taxpayers with undisclosed income from offshore accounts an opportunity to participate in a voluntary disclosure program in order to get current on their tax returns,” Mr Ghatrehee said.

Known as “FBAR”, the Foreign Bank and Financial Accounts law has been in place for some years, but assumed renewed urgency following the 2001 attack on the New York City’s World Trade Center.

“In a way, the terrorists won,” Mr Ghatrehee said. “They wanted the world to change and it did. The US government now wants to see where the terrorists are moving their money.”

As a result, however, FBAR asks every person with a foreign bank account with US-derived income worth more than $10,000 — no matter their citizenship, residence or passport – from 2003 to 2010 to report those accounts to the IRS, and to pay all back income tax that may be due.

The law normally requires individuals to report their accounts by 30 June of the previous year, but Mr Ghatrehee said a new programme targeted those who have not reported their accouts previously.

“The 2011 Offshore Voluntary Disclosure Initiative (OVDI) is available only through Aug. 31, 2011,” he said. “OVDI offers benefits to encourage taxpayers to disclose their foreign accounts now rather than risk an IRS audit and possible criminal prosecution.”

Describing possible repercussions of non-compliance, Mr Ghatrehee cited the case of a US-resident Indian who had approached his firm.

“She paid all her taxes to the IRS” he said, “but had a bank account in India that she did not report.”

Tax authorities discovered the offshore deposits, he said, “and, although she paid all her taxes, she did not file an FBAR”– and now owes a $50,000 penalty.

“The problem is that a lot of people don’t even know about this,” he said. “There are people in Grand Cayman who left the US 15 years or 20 years ago and have never been back, and now the IRS is coming after them.

“The biggest problem, is who they are talking to, who they get hold of. They will ask their attorney or accountant, and they’ll say not to worry, and a lot of people are doing nothing.”

He estimated “a couple of hundred” people would be subject to IRS audits in Cayman, predicting authorities were likely “to come after the big guys, people with accounts of, $500,000 or more.”

Smaller account holders, with $25,000 or $50,000, were likely to escape scrutiny, at least initially.

“It doesn’t make sense to come after these people and prosecute them criminally,” he said. “because you would have to prove they willfully ignored FBAR – and that’s hard to do.”