IRS Voluntary Disclosure Practice
As part of the IRS crack-down on undisclosed foreign financial accounts, the IRS has announced that it intends to: (i) fully enforce civil penalties for FBAR Report non-compliance as far back as 2003; (ii) impose all applicable civil tax penalties on non-compliant taxpayers who fail to report income on foreign financial accounts for all open years; and (iii) in cases of willful disregard of the applicable reporting requirements, bring criminal prosecutions.
As an adjunct to its audit program, the IRS has also implemented and publicized an internal “Voluntary Disclosure Practice” (i.e., an amnesty policy) under which taxpayers who have failed to comply with the FBAR and related income tax reporting rules and who are not currently under IRS audit may voluntarily come into compliance with those rules with reduced, or in some cases no, penalty exposure. U.S. taxpayers who only recently became aware of the FBAR filing requirements should consider whether they failed to comply with FBAR reporting requirements for prior years and, if so, whether they should participate in the amnesty program. Taxpayers currently subject to any IRS audit may not participate in the amnesty program.
Under the amnesty program, if a U.S. person failed to timely file required FBAR reports for any year between 2003 and 2008, the taxpayer can take advantage of the amnesty program by filing the delinquent FBARs by September 23, 2009, together with copies of the filer’s income tax returns for the years in question and an explanation of the reason for failure to timely file (e.g., the taxpayer was unaware of the FBAR filing requirements). The IRS has stated that otherwise applicable FBAR late filing penalties will not be imposed for late filings of FBAR Reports under the amnesty program so long as the taxpayer properly and timely reported and paid all income taxes due on any income earned on the foreign accounts in question.
If a taxpayer also failed to timely report and pay income taxes due with respect to income earned from its undisclosed foreign accounts, the taxpayer can still participate in the amnesty program, but the taxpayer must pay: (i) all taxes and statutory interest due with respect to the unreported foreign account income; (ii) an accuracy-related penalty of 20% of the tax underpayment or, if no return was filed, a delinquent return penalty up to 25% of the tax underpayment; and (iii) an additional FBAR penalty of 20% of the highest account balance during the year of the FBAR violation in which the account balance was greatest. Again, the amnesty program filing deadline is September 23, 2009.
Whether participation in the amnesty program is advisable for a particular taxpayer will depend on the individual facts and circumstances of each case.
This memorandum is intended only as a general discussion of these issues. It is not considered to be legal advice. We would be pleased to provide additional details or advice about specific situations. For additional information on this important topic, please feel free to call us at 469-828-0829 or email to
mahesh@helpfortax.com
Perfect Tax can help you to reduce penalties, file amended return, prepare a letter and application to IRS for relief under amnesty scheme.
