The Internal Revenue Service (“IRS”) continues to make international tax evasion one of its top priorities. In general, all U.S. individuals, corporations and non-corporate entities are required to pay tax on their worldwide income and, under certain circumstances, file reports of foreign accounts. As the IRS continues to amass more information regarding foreign accounts, the risk to individuals, corporations and non-corporate entities who fail to report foreign accounts continues to increase. Because of the requests from taxpayers who want to disclose their foreign accounts but did not take advantage of the previous voluntary disclosure programs, and more importantly, due to the successes of the IRS’ 2009 Offshore Voluntary Disclosure Program (“2009 Program”) and the 2011 Offshore Voluntary Disclosure Initiative (“2011 Initiative”), the IRS has decided to open another Offshore Voluntary Disclosure Program (“New Program”). This New Program is similar to the 2011 Initiative (except for an increase in the highest penalty category) and will offer U.S. taxpayers a chance to resolve their tax liabilities under a fixed penalty structure and minimize their chances of criminal prosecution. Taxpayers who made voluntary disclosures after the closure of the 2011 Initiative are also eligible to participate in the New Program. The New Program is open for an indefinite period until otherwise announced. However, the terms of the New Program could change or it may be terminated at any time. Therefore, if you wish to participate in this New Program, you should act immediately. The IRS Commissioner has indicated that taxpayers who do not come forward voluntarily before the IRS finds them will face higher penalty scenarios, as well as the possibility of criminal prosecution.
FBAR filing requirement
You are required to file a Report of Foreign Bank and Financial Accounts (“FBAR”) if you have a financial interest in, or signature authority over, one or more accounts in a foreign country, and the aggregate value of all foreign accounts exceeds $10,000 at any time during the calendar year. The FBAR must be filed by June 30 of each year and must be filed separately from your tax return. In 2009, the IRS clarified that the FBAR requirement applies to taxpayers having mutual funds, brokerage accounts and other financial accounts, not just bank accounts. If you fail to file an FBAR, you could be subject to criminal penalties, such as a prison term of up to 10 years and a fine of up to $500,000, and civil penalties, such as a monetary penalty of up to the greater of $100,000 or 50 percent of the total balance of the foreign account. These penalties apply to each year you fail to file an FBAR.
New Offshore Voluntary Disclosure Program uniform penalties
If you have failed to file FBARs and have failed to report the foreign income on your U.S. federal income tax returns, you may seek relief under the New Program. Pursuant to the uniform penalty structure under the New Program, you will be required to pay the following taxes and penalties:
- All of the back-taxes and interest for a period of up to eight full tax years prior to the disclosure;
- 20 percent of the amount of the back-taxes for such eight full tax years as an accuracy-related penalty;
- Delinquency penalties, if applicable, and
- 27.5 percent (which is an increase from the 25 percent penalty mandated in the 2011 Initiative) of the amount in the foreign accounts or value of foreign assets in the year with the highest aggregate account balance or asset value during such eight-year period (this penalty is in lieu of the FBAR penalty and other penalties that may apply for failing to file the FBAR).
For example, under the uniform penalty structure, a taxpayer would owe approximately $553,000 in back-taxes and penalties, plus interest, on an account that was worth $1 million in 2004 and earns $50,000 in interest income each year for eight years.
If the taxpayer does not voluntary disclose this unreported foreign income and the IRS discovers the taxpayer’s foreign account, then the taxpayer could face up to approximately $4.5 million in tax, accuracy-related penalties, and FBAR penalties. The taxpayer would also be liable for interest and possibly additional penalties. An examination by the IRS could also lead to criminal prosecution for tax evasion, filing a false return, and other criminal charges that impose significant monetary penalties and prison terms for each year the taxpayer failed to report the foreign account and income generated from such account or foreign assets. For example, if you are convicted of tax evasion, you could be subject to a prison term of up to five years and a fine of up to $250,000. If you are convicted of filing a false return, you could be subject to a prison term of up to three years and a fine of up to $250,000. This example makes various assumptions and is simply being used for illustration purposes only. The particular facts of each situation will dictate the actual calculation of back-taxes, penalties and interest.
Under certain limited circumstances, the 27.5 percent penalty on the highest amount in the foreign account or value of foreign assets during the eight-year period may be reduced to five percent. In addition, if during the entire eight-year period the balance of the foreign account or value of foreign assets was always less than $75,000, the 27.5 percent penalty on the highest amount in the foreign account or value of foreign assets will be reduced to 12.5 percent.
The IRS has stated that simply filing amended returns and reporting the additional unreported income (a “quiet disclosure”) is not sufficient to avoid the penalties discussed in this alert. If you have made a quiet disclosure, you should be aware that the IRS is identifying amended tax returns reporting increases in income and will be examining the amended tax returns to determine if other civil or criminal penalties apply. The IRS is strongly encouraging anyone that has made a quiet disclosure to come forward under this New Program.
New Offshore Voluntary Disclosure Program
The process for making a voluntary disclosure under the New Program has not been completely disclosed, however, it appears to be similar to the process for the 2011 Initiative. The process requires the submission of an Offshore Voluntary Disclosures Letter, which provides initial information to the IRS about you, the circumstances surrounding the creation of the foreign account, and estimates of the unreported foreign income and the value of the amount in the foreign account or foreign assets. In addition, it appears that you will need to provide all of the paperwork required under the 2011 Initiative, including original and amended U.S. federal income tax returns. Furthermore, as required under the 2011 Initiative, it appears that the IRS will require the upfront payment of taxes, interest, accuracy-related penalties and if applicable, delinquency penalties. You will need copies of your foreign account statements in order to amend your U.S. federal income tax returns and to calculate the penalty on the highest amount in the foreign account or value of foreign assets during the period covered by the New Program. Under certain circumstances, the IRS will also require copies of such foreign account statements.
If you wish to participate in the New Program, you should act now before the IRS decides to increase the penalty structure or close the New Program. The penalty for failing to file the FBAR has continued to increase with each offshore voluntary disclosure program. Therefore, it is imperative to act before the penalty increases again.
The IRS recognizes that the success of its offshore enforcement and the disclosure programs has raised awareness regarding tax filing obligations, including the tax filing obligations of dual citizens and others who may be delinquent in filing but owe no U.S. tax. The IRS is currently developing procedures by which these taxpayers may come into compliance with U.S. tax law. However, those procedures have not been announced and taxpayers in this situation should seriously consider filing under the New Program to avoid additional penalties.
The IRS is continuing to increase its scrutiny of foreign accounts and has stated that it has a number of foreign financial institutions under investigation based on information received from the voluntary disclosures made during the 2009 Program and the 2011 Initiative. Therefore, the risk of being discovered will only increase once these foreign financial institutions begin disclosing their customer lists. The IRS has stated that if you do not voluntarily disclose your foreign income and foreign accounts before the IRS finds you, you will face harsher civil penalties and possible criminal prosecution.
Therefore, if you have not been filing FBARs and/or reporting your foreign income on your U.S. federal income tax returns, we encourage you to contact us as soon as possible regarding the disclosure of such activities to the IRS. If you have any unreported foreign accounts or foreign assets, please call us at your earliest convenience to discuss your particular situation.
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