The Internal Revenue Service recently dangled a carrot in front of American taxpayers, encouraging them to voluntarily disclose unreported foreign bank accounts through the 2011 Offshore Voluntary Disclosure Initiative with the lure of certainty and a guarantee of no criminal prosecution. Although the OVDI closed in September, there are still options for people with offshore bank accounts who wish to come into compliance with IRS regulations.
Foreign Bank Account Reporting
In general, taxpayers with foreign bank accounts worth more than $10,000 must report the bank account to the IRS, even if they pay taxes on the account to a different country. In addition to reporting offshore accounts on their tax returns, taxpayers also must file a Report of Foreign Bank and Financial Accounts, commonly known as an FBAR.
Failure to file an FBAR can carry severe consequences such as a $10,000 fine for non-intentional failure to file. Willful failure to file an FBAR may result in a fine of $100,000 or 50 percent of the value of the offshore account, whichever is greater. The fines apply for each year the account was unreported. Further, people with undisclosed bank accounts risk prosecution for tax evasion and other tax crimes.
2011 Offshore Voluntary Disclosure Initiative
In February 2011, however, the IRS announced the provisions of its second voluntary disclosure program. The program offered taxpayers a chance to report their offshore bank accounts in exchange for a promise of no criminal prosecution and for set penalty amounts that could be calculated in advance of participating in the program.
Participating taxpayers had to pay back taxes, interest, fees and penalties of 25 percent of the highest aggregate amount in the offshore accounts for an eight-year period from 2003 to 2010. The original deadline for participation in the 2011 OVDI was August, 31, 2011, but the deadline was extended to September 9, 2011 because of the potential impact of Hurricane Irene making landfall on the East Coast of the U.S.
A 25 percent penalty instead of a possible 50 percent penalty for unreported foreign bank accounts is a significant discount, but not everyone was able to or desired to participate in the program. For people who did not participate in the 2011 OVDI, other options exist to come into compliance.
IRS Voluntary Disclosure Practice
For instance, taxpayers may take advantage of the IRS's Voluntary Disclosure Practice to disclose their previously unreported offshore bank accounts. According to the IRS, if a taxpayer makes a timely, truthful and complete disclosure to the IRS through its Voluntary Disclosure Practice, the IRS will not recommend the case for criminal prosecution. Such a disclosure is made when:
•· The taxpayer cooperates willingly with the IRS in determining his or her tax liability
•· The taxpayer makes good faith arrangements to pay back taxes, interest and any penalties in full
An Attorney Can Help
When choosing to disclose unreported assets to the IRS, the counsel of an experienced tax attorney is extremely important. If you would like to report an offshore bank account or are wondering whether the FBAR requirements apply to you, contact a knowledge tax lawyer for more information.
