Potentially good news for those taxpayers who have foreign accounts and have not reported them to the IRS under the onerous FBAR rules. Under the FBAR (foreign bank account reporting) rules, simply stated, any U.S. taxpayer who has foreign bank accounts that had over $10,000 during the year are required to file a form with the IRS by June 30th of each year (with no extension of time for filing). There are significant penalties for failing to report this information.
The IRS has unwrapped a new voluntary disclosure initiative that will give taxpayers with undisclosed income from offshore accounts for the 2003—2010 period the chance to get current with their taxes. The new voluntary disclosure initiative will be available through Aug. 31, 2011.
Under the 2011 Offshore Voluntary Disclosure Initiative (OVDI) taxpayers that fully comply with the offer will avoid criminal prosecution and will be able to calculate, with a reasonable degree of certainty, the total cost of resolving all offshore tax issues. Taxpayers who do not submit a voluntary disclosure run the risk of detection by IRS and the imposition of substantial penalties, including a fraud penalty and foreign information return penalties, and an increased risk of criminal prosecution.
At a high level, the penalty for complying to the law on foreign accounts will be a 20% accuracy-related penalty for any income tax underpayment, any failure to file and pay penalties plus a penalty for not filing the FBAR equal to 25% (or in limited cases 12.5% or 5%) of the highest aggregate balance in foreign bank accounts/entities or value of foreign assets during the period covered by the voluntary disclosure.
The 25% FBAR penalty is reduced to 12.5% if the taxpayer’s highest aggregate account balance in each of the years covered by the 2011 OVDI is less than $75,000. This penalty can be reduced to 5% if a variety of other criteria is satisfied.
This is an extremely complex area of tax law. Please contact us if you have any questions regarding reporting foreign activity or compliance under this voluntary program.