IRS Announces Severe Actions for Undisclosed Foreign Bank and Financial Accounts
IRS Crackdown on Undisclosed Foreign Bank and Financial Accounts
Background
The IRS is currently conducting a highly-publicized, large-scale audit program targeting taxpayers who have avoided or evaded U.S. income taxes through the use of undisclosed Swiss and other foreign bank and financial accounts.
The deadline for submissions under the amnesty program is October 15, 2009.
Foreign Bank and Financial Account Reporting Requirements
FBAR Reports
Treasury Regulations under the Federal Bank Secrecy Act require any “U.S. person” who has a “financial interest” in, or signature or other comparable authority over, one or more “financial accounts” maintained in a foreign country to file an annual report identifying their foreign accounts if the aggregate account value exceeds $10,000 during the calendar year. Those annual reports, commonly referred to as “FBAR Reports,” must be filed with the Department of Treasury on Form TD F 90-22.1 separate and apart from income tax returns. FBAR Reports for a particular calendar year normally are due on June 30th of the succeeding year.
For purposes of the FBAR reporting rules: A “U.S. person” is a citizen or resident of the U.S. or a domestic partnership, corporation, LLC, estate or trust.
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Notice 2009-62 Relief from FBAR Reporting Requirements .In late 2008, the IRS indicated that foreign “financial accounts” subject to FBAR Reporting include interests in commingled funds maintained outside the U.S. (e.g., foreign mutual funds, foreign private equity funds, foreign hedge funds, etc.).
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Income Tax Return Reporting of Foreign Accounts.
In addition to the FBAR reporting rules, U.S. Federal tax law requires U.S. taxpayers to properly report on their U.S.
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Penalties for Non-Compliance with Reporting Requirements
Civil penalties for failure to timely file a FBAR Report can be severe - up to $10,000 for each unintentional violation or, in the case of willful violations, the greater of $100,000 or 50% of the account balance at the time of the violation.
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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.
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Advantage: 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).
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