Currently, the IRS considers international tax enforcement its top priority. Therefore, if you have a foreign bank account, it is extremely important to be aware of your reporting requirements or else be subject to substantial penalties and criminal prosecution.
- The 2012 Offshore Voluntary Disclosure Program ("OVDP")
On January 9, 2012, the IRS announced its third OVDP. The purpose of this program is to help people with undisclosed income from foreign accounts become current with their US tax obligations. The IRS has not yet released additional guidance to assist taxpayers in participating in this program and there is no deadline to participate (currently the guidance in existence is from the 2011 OVDP).
Only those taxpayer who are not currently under civil or criminal investigation by the IRS may participate in this program.
For those who choose to participate in this program by making a voluntary disclosure, the IRS promises that significant civil penalties and criminal prosecution will not be imposed. In order to participate:
- The taxpayer must file FBARS (see below) and amended income tax returns for the last eight years
- The taxpayer must pay all income tax owed to the U.S. plus a 20% accuracy-related penalty and interest for the eight years of returns
- The taxpayer must pay 27.5% of the highest aggregate balance in the undeclared foreign account during the past eight years. There are exceptions to this rule.
U.S. persons must disclose their financial interests in, signature authority over or other authority over, foreign bank, security or financial accounts if the aggregate value of each account(s) exceeds $10,000 at any time during the year. This requires the filing of a Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts ("FBAR"). The FBAR is an information return which is filed separately from the taxpayer's income tax return. The deadline to file an FBAR is June 30th.
If the IRS determines that a taxpayer's failure to file this form is willful, the IRS can impose substantial civil and criminal penalties. If the violation is not willful, the penalty shall not exceed $10,000 per violation. If the failure to file is due to reasonable cause and the account was properly reported, no penalty should be imposed.
For each willful violation, the IRS shall impose a penalty which is the greater of $100,000 or 50% of the value of the account at the time of the violation (the time of the violation occurs on the due date for filing the FBAR). A willful violation also subjects the taxpayer to five years in prison and/or a maximum fine of $250,000.