In a 1789 letter to French historian Jean-Baptiste Leroy, Benjamin Franklin wrote that "In this world, nothing can be said to be certain except death and taxes." His words are still true today, as even Americans with assets overseas seemingly cannot escape the reach of U.S. taxation authorities.
The Internal Revenue Service requires all U.S. citizens to report income received in the U.S. and from abroad. Failure to report foreign income, including interests in offshore bank accounts, could result in severe civil and criminal penalties. To encourage voluntary reporting of previously undisclosed foreign assets, the IRS has offered two voluntary disclosure programs (in 2009 and 2011) that allow people to disclose their unreported foreign bank accounts with reduced penalties and without the threat of criminal prosecution for failure to report.
FBAR Filing Requirements
According to the IRS, Form TD F 90-22.1, the Report of Foreign Bank and Financial Accounts - commonly called an FBAR - is a tool used to identify people who may be evading U.S. laws with foreign financial accounts and to identify unreported income maintained or generated in other countries.
In February 2011, the U.S. Treasury Department issued final regulations regarding FBAR filing requirements. These federal regulations require "United States persons" to file an FBAR in 2011 if:
•· The person had a financial interest in or signature authority over a financial account located in a foreign country.
•· The sum value of all the person's foreign financial accounts exceeded $10,000 at any time in 2010.
A United States person is defined as:
•· U.S. citizens or residents
•· U.S. business entities, including corporations, limited liability companies, partnerships and trusts formed under U.S. laws
However, several exceptions to the FBAR filing requirement are given in the regulations, including the following foreign financial accounts or recipients:
•· Foreign financial accounts maintained at U.S. military banking facilities
•· Foreign financial accounts owned by a government entity
•· Foreign financial accounts owned by an international financial institution
•· Trust beneficiaries
•· IRA and other tax-qualified retirement plan owners and beneficiaries
Penalties for Failure to Report
Failure to file an FBAR when required can result in large civil penalties and criminal prosecution. The IRS states that civil fines for willful failure to file an FBAR can reach $100,000 or half of the total balance of the foreign account for each violation. For non-willful failure to report, the civil fines may be $10,000 for each violation.
In addition to civil penalties, a person who fails to file a required FBAR also may face criminal investigation and prosecution. Possible criminal charges following an IRS Criminal Investigation include:
•· Tax evasion
•· Failure to file an income tax return
•· Willful failure to file an FBAR
•· Willful filing of a false FBAR
A conviction for any of these offenses may result in a jail sentence and fines. A conviction for tax evasion carries a prison term of up to five years and a fine of up to $250,000. The sentence for failing to file a tax return is prison for up to one year and a fine of up to $100,000. A conviction for filing a false return carries a three year prison term and up to a $250,000 fine. Most important, failing to file an FBAR when required could result in a prison term of up to 10 years and up to a $500,000 fine.
2011 Offshore Voluntary Disclosure Initiative
To encourage United States persons to voluntarily disclose their previously unreported foreign financial accounts, the IRS has administered a two voluntary disclosure programs that offer lighter penalties than might occur following regular examination and discovery of unreported offshore accounts.
The first program, the 2009 Offshore Voluntary Disclosure Program, resulted in 15,000 voluntary disclosures. It offered a 20 percent offshore penalty on any unreported accounts that qualified for reporting within the previous six years in exchange for the promise of no criminal prosecution.
The second program, the 2011 Offshore Voluntary Disclosure Initiative, is available through the end of August 2011. People who failed to meet the FBAR filing requirement from 2003 through 2010 may disclose their foreign financial accounts in the 2011 OVDI and again receive a promise of no criminal prosecution in exchange for paying certain offshore penalties.
The offshore penalties are different for 2011 than in 2009, and - to be fair to those who came forward in 2009 - include a higher offshore penalty percentage for the majority of the participants. Most people participating in the 2011 OVDI must pay 25 percent of the highest aggregate amount in their unreported foreign financial accounts from 2003 to 2010.
However, some participants' penalties may be 5 or 12.5 percent if they had total undisclosed assets worth $75,000 or less or certain unusual circumstances. All participants are required to pay back-taxes and interest as well.
OVDI Requirements Are More Expansive Than FBAR Requirements
Although the IRS takes a broad view of the assets that must be reported in an FBAR, the range of assets that must be reported in the 2011 OVDI is even greater.
As stated in the regulations, United States persons must report in an FBAR all foreign financial accounts that exceeded $10,000 in 2010. For the 2011 OVDI, the IRS requires participants to report all foreign assets, "regardless of the form of the taxpayer's ownership or the character of the asset" from 2003 to 2010. While the FBAR filing requirements are limited to foreign financial accounts, the 2011 OVDI requires disclosure of various additional assets, including:
•· Foreign financial accounts holding cash, securities or other assets
•· Tangible assets such as gold, real estate or art
•· Intangible assets like stock, patents or business ownership interests
In this way, the IRS is reaching assets through the 2011 OVDI that it ordinarily would not reach through regular FBAR filings.
The rules governing FBARs and the 2011 OVDI are complex. If you are wondering if you should file an FBAR or are considering participating in the 2011 OVDI, contact a knowledgeable tax attorney first to discuss your unique situation and the right strategy for you.
