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Foreign Account Disclosures

IRS RAISES THE STAKES FOR U.S. TAXPAYERS WITH OFFSHORE ACCOUNTS

This summer, the IRS reworked its offshore voluntary disclosure program, substantially raising the penalty for U.S. taxpayers who fail to disclose their overseas accounts before the IRS catches them. The program is part of a wider effort by the IRS to stop offshore tax evasion by targeting not only individual taxpayers, but also foreign financial institutions holding their accounts.

Beginning August 4, 2014, a 50% penalty will apply if a foreign financial institution holding a taxpayer’s undisclosed account has been publicly identified as being under investigation or is publicly cooperating with a government investigation. In other words, the message to taxpayers is–get to them (the IRS) before they get to you.

The current Offshore Voluntary Disclosure Program was launched in 2012 and is the successor to prior voluntary programs offered in 2011 and 2009. The program offers U.S. taxpayers with undisclosed income from offshore accounts an opportunity to come clean. In return, the taxpayers face reduced penalties and can avoid criminal prosecution. The program has no time limit, but it could end at any time.

Taxpayers with foreign accounts have another worry. On July 1, 2014, another new information reporting regime, the Foreign Account Tax Compliance Act (FATCA), went into effect. Under that program, thousands of foreign financial institutions will begin to report to the IRS on the foreign accounts held by U.S. persons.

Foreign Account Disclosure Requirements

U.S. citizens, residents and other people subject to U.S. tax who have foreign accounts with an aggregate value exceeding $10,000 at any time during the year must report the accounts to the IRS. The reporting form (FBAR or the new FinCEN form) is not filed with a federal tax return, but instead must be filed by June 30 each year. The civil penalty for willfully failing to file a foreign bank account reporting form can be as high as the greater of $100,000 or 50 percent of the total balance of the foreign financial account per violation. Non-willful violations are subject to a $10,000 penalty per violation.

Newly Expanded Streamlined Filing Procedures

The IRS’s latest rules expand the streamlined procedures first announced in 2012. Those procedures were available only to non-resident, non-filers. The expanded streamlined procedures are intended for U.S. taxpayers who were not willful in failing to disclose their offshore assets. The program is available to taxpayers living outside the country as well as those residing in the United States. The process provides taxpayers: (1) a streamlined procedure for filing amended or delinquent returns; and (2) terms for resolving their tax and penalty obligations.

The new process:

  • Eliminates the requirement that the taxpayer have $1,500 or less of unpaid tax in each year;
  • Eliminates a required risk questionnaire;
  • Requires taxpayers to certify that previous failures to comply were not due to willful conduct.

For eligible U.S. taxpayers residing outside the United States, all penalties will be waived. For eligible U.S. taxpayers residing in the United States, the only penalty will be a miscellaneous offshore penalty equal to 5 percent of the foreign account balances not previously reported. This new penalty structure applies to taxpayers currently participating in the program as well.

Key Features of the Offshore Disclosure Program

Under the terms of the revised Offshore Voluntary Disclosure Program, taxpayers must:

  • Come forward before the IRS catches them and before their financial institution is publicly under investigation or is known to be cooperating with the IRS
  • Provide documents and information on foreign accounts and assets, institutions and facilitators, and sign agreements to extend the period of time for assessing tax and penalties
  • Submit all account statements and pay the offshore penalty at the time of the voluntary disclosure program application
  • Agree to cooperate with IRS and Department of Justice offshore enforcement efforts, if requested, by providing information about financial institutions and other facilitators who helped the taxpayer establish or maintain an offshore arrangement

‘Quiet Disclosure’ Doesn’t Help

There are numerous penalties for nondisclosure. The penalties can be for failure to file, failure to pay, understatement of taxes, and fraud. In addition, taxpayers may face criminal charges for tax evasion and failure to file a return. Taxpayers who file amended returns reporting income from foreign assets without actually making voluntary disclosures are not protected from criminal penalties. The IRS wants to discourage taxpayers from attempting these so-called “quiet disclosures” and instead wants taxpayers to affirmatively disclose their noncompliance through the voluntary disclosure program.

Conclusion

The disclosure program has been a success, according to the IRS. Since the launch of the first offshore voluntary disclosure program, the agency reports that more than 45,000 taxpayers have come into compliance voluntarily, paying about $6.5 billion in taxes, interest and penalties.

The numbers above reflect the fact that the IRS’s increased enforcement efforts have raised the risk of detection for taxpayers with undisclosed foreign assets. Taxpayers are getting the message that voluntary disclosure may be the best way to avoid prosecution and limit exposure to civil penalties.

Making a voluntary disclosure also provides a taxpayer with the opportunity to calculate, with some certainty, the total cost of resolving all offshore tax issues. Taxpayers who do not submit a voluntary disclosure face substantial penalties and an increased risk of criminal prosecution. That being said, the voluntary disclosure process is complex and has to be done with caution. It is important that taxpayers consult with a tax professional to protect their rights and guide them through the process.

To access the IRS webpage with the new FAQs and other information on the program, follow this link: Offshore Voluntary Disclosure Program.

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