Over the last several years, the IRS has placed a high priority on stopping offshore tax cheating and bringing individuals back into the tax system. Ongoing efforts by the IRS, as well as the Department of Justice, have raised awareness of tax and information reporting requirements for non-U.S. investments.
For instance, you are required to file an FBAR (Report of Foreign Bank and Financial Accounts) if you have a financial interest in, signature authority, or other authority over foreign financial accounts whose aggregate value exceeds $10,000 at any time during the calendar year.
A foreign financial account is defined as a financial account located outside the U.S. and includes securities, brokerage, savings, demand, checking, deposit, time deposit, or other accounts maintained with a financial institution. It can also include a commodity futures or options account, an insurance policy or annuity policy with a cash value, or shares in a mutual fund or similar pooled fund. A debit card account is also treated as a financial account, as is a credit card account under certain circumstances.
The FBAR is due by June 30 following the calendar year for which it applies. Thus, FBARS for the 2013 calendar year were due on or before June 30, 2014.
If you or your client did not file an FBAR when it was required, you can take advantage of voluntary disclosure programs. Originally established in 2009, these programs are designed to encourage taxpayers to come forward and become current in their FBAR filings and to pay their tax liabilities. They have resulted in more than 45,000 voluntary disclosures from individuals who have paid over $6.5 billion in back taxes, interest, and penalties.
The IRS offers three voluntary disclosure options:
- Offshore Voluntary Disclosure Program
- Streamlined Filing Compliance Procedures
- Delinquent FBAR submission procedures
Offshore Voluntary Disclosure Program
The Offshore Voluntary Disclosure Program (OVDP) is designed for taxpayers with exposure to potential criminal liability and/or substantial civil penalties due to a willful failure to report foreign financial assets and pay all tax due with respect to those assets. OVDP provides protection from criminal liability and terms for resolving civil tax and penalty obligations. In addition to the penalties that can be assessed on the tax on the unreported income, there will be an offshore penalty from 27.5 percent to 50 percent of the highest aggregate value of the foreign financial assets in the unreported accounts.
Streamlined Filing Compliance Procedures
Streamlined filing compliance procedures are available to taxpayers who certify that their failure to report foreign financial assets and pay all tax due in respect of those assets did not result from willful conduct on their part. They offer a streamlined procedure for filing amended or delinquent returns and terms for resolving tax and penalty obligations. Persons filing under these provisions are subject to an offshore penalty of 5 percent of the highest aggregate value of the foreign financial assets in the unreported accounts.
Delinquent FBAR submission procedures
Taxpayers who have not filed a required FBAR, are not under a civil examination or a criminal investigation by the IRS, and have not already been contacted by the IRS about the delinquent FBARs should file the delinquent FBARs and include a statement explaining why the FBARs are filed late. The IRS will not impose a penalty if you properly reported on your U.S. tax returns, and paid all tax on, the income from the foreign financial accounts reported on the delinquent FBARs.
If you or a client has not filed required FBARs in the past, now is the time to come forward. Although the penalties are stiff under the OVDP program, they will be much worse if the IRS notifies you and they may include jail time. Please contact us to discuss the options that may be best suited for your circumstances.
We will be happy to provide further information relating to this subject. For more information, contact Richard J. Nelson, Director, Tax Strategies at firstname.lastname@example.org or 215.441.4600.