IRS VOLUNTARY DISCLOSURE PROGRAM
Reporting Foreign Bank Accounts and Foreign Income for U.S. Taxpayers
Reports indicate that for many years numerous U.S. taxpayers have maintained or have had signatory authority over foreign bank and financial accounts that have not been disclosed to the Internal Revenue Service (IRS) and the income earned from or through those accounts has not been reported on their U.S. income tax returns.
The U.S. Department of Justice has reportedly opened criminal investigations against many American taxpayers and the IRS has recently established a voluntary disclosure program (which in most cases will be handled as a civil matter) – which ends on September 23, 2009. Many individuals who have failed to file Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (FBAR) and have failed to report foreign source income on their U.S. income tax returns may need to take steps to resolve their filing requirements and tax obligations before their name and foreign bank and financial account information is obtained by the U.S. Department of Justice and more criminal investigations are initiated.
Specifically, on March 26, 2009, IRS Commissioner Douglas Shulman announced a new voluntary disclosure program (the “Program”) for undeclared bank or financial accounts and unreported income from foreign bank or financial accounts. The Program is available until September 23, 2009, and provides taxpayers meeting the requirements to avoid criminal prosecution and civil fraud penalties of up to 75% of the tax due. Under the Program, taxpayers will have to file up to 6-years of tax returns, either amended or delinquent, and pay all taxes and interest due.
Additionally, taxpayers will either incur a 20% accuracy related penalty or 25% delinquency penalty, as well as a one time penalty of up to 20% of the highest aggregate balance held in the bank account during the 6-year period (under the Bank Secrecy Act, such penalty could otherwise be assessed at 50% of the bank account balance in each taxable year – thus effectively eliminating the bank account balance with only two years of non-compliance without taking advantage of the Program). Guidance issued by the IRS, states that the one time 20% penalty applies to all assets (or at least the taxpayer’s share) held by foreign entities (e.g., trusts and corporations) for which the taxpayer was required to file information returns, as well as all foreign assets (e.g., financial accounts, tangible assets such as real estate or art, and intangible assets such as patents or stock or other interests in a U.S. business) held or controlled by the taxpayer. The IRS will reduce the latter 20% penalty to 5% in cases only where (1) the taxpayer did not open or cause any accounts to be opened or entities formed, (2) there has been no activity during the period when the account or entity was controlled by the taxpayer, and (3) all U.S. taxes have been paid on the funds in the account or entity. Further, the IRS will require taxpayers to file Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts, for the undeclared foreign accounts. For taxpayers who reported and paid tax on all their taxable income for prior years but did not file FBARs, they should file delinquent FBAR reports and attach a statement explaining why the reports are filed late. These need to be filed by September 23, 2009. The IRS will not impose a penalty for the failure to file FBARs.
Lastly, entities, such as corporations, partnerships and trusts are eligible for the Program. All taxpayers (individuals, corporations, partnerships and trusts) are required to file correct delinquent or amended tax returns for tax year 2008 back to 2003. Consequently, tax years ending prior to January 1, 2003 will not be subject to any income adjustments or interest and penalties.
Successful voluntary disclosure – within the short time frame stipulated by the IRS under the Program – can potentially fully resolve any criminal exposure and minimize the possible impact of civil penalties. Moving quickly may also ease the repatriation of funds into U.S. banking institutions. However, it is important to proceed with caution and the right guidance and support.
The IRS has stepped up its enforcement efforts, including the use of John Doe summonses, to identify taxpayers using offshore accounts and entities to avoid tax. In addition, the IRS continues to receive information from whistleblowers and other taxpayers making voluntary disclosures. If the IRS receives specific information about a taxpayer’s noncompliance before the taxpayer attempts to make a voluntary disclosure, the disclosure will not be timely and the taxpayer will not be eligible for the criminal and civil penalty relief available under the voluntary disclosure practice. Therefore, taxpayers should not wait until the end of the 6-month period to avail themselves of the Program as there is no guarantee that the taxpayer will still be eligible or that the current penalty terms will be available after 6 months.
Please contact us at (516) 932-4400 or
www.bdslawoffice.com should you have any questions about this program.
IRS CIRCULAR 230 DISCLOSURE:
Treasury Regulations require us to inform you that any Federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.
