The IRS has announced a new amnesty program for U.S. persons
with undisclosed foreign accounts or entities. U.S. persons with
foreign accounts are required to report the existence of the
accounts annually on Form TD F 90-22.1.1 Other reporting
requirements apply to interests owned by U.S. taxpayers in foreign
entities. A failure to report the existence of a foreign account
can result in stiff civil penalties and may constitute a criminal
offense.2 The IRS has greatly increased its enforcement
efforts in this area and, following its highly publicized
indictment of UBS in 2008, is actively pursuing investigations of
other financial institutions that cater to U.S. taxpayers who are
hiding accounts overseas.
The new voluntary disclosure program is similar to one that ended
in 2009 and which brought in 15,000 voluntary disclosures. However,
the IRS appears to have learned some lessons from the prior
initiative and has tweaked the terms of the new initiative in a
number of respects to deal with issues it encountered under the old
program. Following are a few highlights of the 2011 voluntary
disclosure program and how it differs from the 2009 program.
- Taxpayers who enter the 2011 program are required to file original or amended federal income tax returns for the years 2003 through 2010 (or eight years) to report any income omitted from their offshore assets, along with any information returns such as the Report of Foreign Bank Accounts on Form TD F 90-22.1 ("FBAR"). One potentially significant difference from the 2009 program is that taxpayers are required under the new program to file all of the foregoing returns by August 31, 2011, which is the last day of the 2011 program. Under the 2009 program, taxpayers were merely required to provide some basic information about their noncompliance by the expiration date of that program. It took many taxpayers six months or longer to gather all of the information on their foreign accounts and prepare their tax and information returns. If the August 31st filing deadline is applied strictly, it effectively requires taxpayers to begin the process of gathering that information and preparing the returns immediately in order to ensure that they can meet the filing deadline.
- Any unreported income for the years covered by the required filings is subject to tax at the normal rates and is subject to an additional 20% understatement penalty, as well as interest charges at the normal underpayment rates. As under the 2009 program, taxpayers who enter the 2011 program are not required to pay any tax on unreported income they earned prior to 2003.
- Apart from the understatement penalty for the unreported income earned during the period from 2003 through 2010, taxpayers who enter the program are generally required to pay a one-time additional penalty, in lieu of the various penalties that could otherwise apply for failing to report the existence of the foreign account (or entity). The IRS has increased the basic penalty for unreported accounts to 25% (from 20% under the 2009 program) of the highest balance in the unreported accounts during the period covered by the voluntary disclosure (though as discussed below some taxpayers may qualify for a 5% or a 12.5% penalty instead).
- Like the 2009 program, the 2011 program includes a reduced 5% additional penalty tier (in lieu of the 25% additional penalty) for taxpayers whose noncompliance is less egregious. The IRS agents administering the 2009 program have applied the requirements for the 5% penalty so strictly that, according to inside sources, only a single taxpayer, among the approximately 5000 cases being handled by the New York branch, qualified for the 5% penalty. Changes in the current program should make the 5% penalty available for more applicants.
- The 2011 program includes a new 12.5% penalty tier for a taxpayer whose accounts had a balance smaller than $75,000 for every year covered by the voluntary disclosure.
- Taxpayers who made voluntary disclosures under the 2009 program and who believe they would be entitled to more favorable treatment under the terms of the 2011 program can request that their cases be reviewed.
If you are an owner of a foreign account or entity and have failed to properly report your interest in the account or entity, we urge you to consider taking advantage of the new voluntary disclosure program, as this may well be the last such opportunity the IRS will offer.
Footnotes
1.Temporary relief offered by the IRS for individuals with signature authority over, but no beneficial interest in, a foreign account expires this year.
2. For example, a willful failure to report a foreign bank account can result in a penalty equal to 50% of the highest balance in the account per year.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.