International tax evasion in the form of undisclosed and unreported offshore financial accounts costs the federal government as much as $100 billion in lost revenue each year. That makes it an obvious priority for enforcement activity.
If you have an offshore financial or bank account, you’re likely subject to federal taxation and reporting requirements―just as you are for your U.S. accounts. However, foreign financial institutions aren’t subject to the same reporting requirements as their U.S. counterparts, so the income from many foreign accounts goes unreported, often unknowingly, by their owners.
If the IRS finds that you’ve failed to disclose your offshore accounts—even unknowingly—you’re subject to criminal prosecution and some fairly major financial penalties.
However, the IRS is also ensuring that there’s money in honestly reporting previously undisclosed offshore financial accounts. This month, in what Commissioner Shulman called “the last, best chance for people to get back into the system,” the IRS announced a new offshore voluntary disclosure initiative.
Under the terms of the initiative, you can avoid criminal prosecution and certain penalties by filing all new and amended tax returns, and paying all taxes and related penalties and interest, by an August 31, 2011 deadline.
The voluntary disclosure initiative generally begins with a voluntary disclosure letter to the IRS, followed by submission of a complete voluntary disclosure package that includes your original and amended tax forms, as well as offshore-related information and Report of Foreign Bank and Financial Accounts (FBAR) forms.
Given the imminent deadline, it’s important to start this complex process early
Eligibility for the Voluntary Disclosure Initiative
The initiative is generally available to individuals, corporations, partnerships and estates that own undisclosed offshore financial and/or bank accounts. There is an exception: If you’re already under examination or criminal prosecution, you’re not eligible.
If you’ve already made what is generally referred to as a quiet disclosure by filing amended returns and paying the related tax and interest—but you haven’t actually notified the IRS—you’re still eligible to participate in the initiative. By choosing to participate, you’re protected from the risk of future examinations and criminal prosecutions.
Tax and Reporting Requirements
The voluntary disclosure initiative requires that you report and pay all taxes and related interest for an eight-year period extending from 2003 through 2010—or make good faith arrangements with the IRS to do so.
You’ll need to submit copies of all previously filed returns for this period, along with any previously filed amended returns. You must also prepare and file amended returns for each year reflecting the impact of your previously unreported financial accounts.
FBAR Reporting Requirements
You’re required to file Form TD F 90-22.1 Report of Foreign Bank and Financial Accounts (FBAR) for the same eight-year period.
To remain in compliance with FBAR reporting requirements, you must file Form TD F 90-22.1 on an annual basis thereafter. For more information on FBAR reporting requirements, refer to our previous article Have a Foreign Bank Account, Brokerage Account, Hedge Fund or Mutual Fund?
Generally, if you hold any of the offshore assets through a foreign corporation or trust that you control, you also need to file complete and accurate Form 5471 or Form 3520 information returns.
In addition to paying the tax and interest due on your undisclosed accounts, you’re subject to the following penalties under the voluntary disclosure program:
Miscellaneous penalty, equal to 25 percent of the highest aggregate balance in your foreign accounts during the applicable eight-year period—reduced to 12.5 percent if the value of the assets in your offshore accounts has consistently remained under $75,000 during the period.
Accuracy-related penalty of 20 percent on the full amount of your underpaid taxes for all years.
Failure-to-file penalty for the income tax returns being amended.
Failure-to-pay penalty for the income tax returns being amended.
These penalties are in lieu of all other penalties that might otherwise apply. As a result, your civil liability is significantly reduced. For example, outside of the terms of the initiative, you could be assessed a civil penalty for willingly failing to file a required FBAR that is equal to the higher of $100,000 or 50 percent of the balance of the financial account-for each violation.
Under the initiative, you also gain valuable certainty with regard to the financial consequences of your failure to disclose.
If you think you may have undisclosed financial accounts, it’s critical that you give us a call to discuss your situation—including any possible state tax consequences—as soon as possible. The potential civil and criminal consequences of failing to report offshore accounts are severe and the time to qualify for the offshore voluntary disclosure initiative is limited.