Sunday, April 15, 2012

Foreign Account Disclosure and IRS Amnesty

Any United States person, such as a US citizen or a legal permanent resident, with foreign bank accounts with an aggregate value exceeding $10,000.00 must report yearly such holdings to the IRS. This is done by filing a Report of Foreign Bank and Accounts ("FBAR"), form TD F 90-22.1.

By now, the IRS has made it clear that foreign account compliance is one of its major initiatives. The IRS previously said it was unlikely to offer amnesty following its 2009 and 2011 programs. The good news is that on January 9, 2012, the IRS reopened the Offshore Voluntary Disclosure Program ("OVDP") following continued strong interest from taxpayers and tax practitioners after the closure of the 2011 and 2009 programs. This program will be open for an indefinite period until otherwise announced. The OVDP eliminates potential criminal penalties and greatly reduces monetary penalties.
Many taxpayers, when filing their annual tax returns, did not pay attention to reporting their foreign bank accounts. Likely, they neglected to answer the question correctly or answer the question at all of whether they have any financial accounts in a foreign country on Schedule B of their Form 1040. Additionally, they neglected to file the annual FBAR mentioned above.You are required to make a detailed disclosure of where and how much you have in foreign bank accounts. The FBAR is due June 30th of each year.

Now that the OVDP amnesty is being offered indefinitely, taxpayers might want to consider doing a voluntary disclosure. Currently, the penalty is 27.5% on the highest aggregate balance of financial accounts in foreign countries during the eight years before disclosure. This is up from 25% in the year 2011 and 20% in the year 2009. Participants must file all original and amended tax returns and include payment for back taxes and interest for up to eight years as well as paying accuracy-related penalty of 20% of the outstanding tax liability and delinquency penalties of as high as 25% of the tax liability owed per year.

Some taxpayers, in limited situations, will be eligible for a 12.5 or 5% tax penalty under the OVDP. Smaller offshore accounts will face a 12.5% penalty. People whose offshore accounts or assets did not surpass $75,000.00 in any calendar year covered by the new OVDP will qualify for this lower rate. Participants of the OVDP may only be subject to a reduced 5% penalty for accounts not opened by the participant. In addition, the taxpayer must have only had a minimal contact with the account. Minimal contact means that the taxpayer had withdrawn no more than $1,000 per year. Nonresidents who paid taxes in their foreign country and earned less than $10,000 of U.S. source income may also be eligible for the 5% penalty.

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