On September 21, 2009, the Internal Revenue Service announced that it was extending the deadline for participation in its voluntary disclosure settlement initiative for U.S. citizens holding undeclared foreign bank accounts. The program was to have closed on September 23, 2009. In announcing the extension, the IRS stated that it had received repeated requests from tax practitioners for more time, and that to date over 3,000 taxpayers had come forward under the program which began in March 2009. The new deadline, which the IRS has said will not be extended further, is October 15, 2009.
Having an offshore bank account is not illegal. However, all U.S. citizens are required to disclose whether they maintain a foreign bank account by filing a foreign bank account reporting form (commonly known as the "FBAR" form) with the Treasury Department every year, as well as by checking off a box and reporting any interest or dividend income on their federal income tax return. The failure to file the FBAR form and report income from the account can subject the taxpayer to criminal charges including tax evasion, as well as substantial civil penalties. The civil penalty for a willful violation of the FBAR statute was increased in 2004 to $100,000 or 50 percent of the highest balance in the account for each year that the FBAR form was not filed, whichever is higher.
Under the terms of the voluntary disclosure settlement initiative, the IRS modified the penalty structure applicable to foreign bank account reporting to encourage U.S. citizens to make voluntary disclosures to the IRS regarding offshore bank accounts in exchange for avoiding criminal prosecution. While the IRS has maintained a voluntary disclosure program for some time, under this program, the IRS will reduce the usual FBAR penalty to a one-time payment of 20 percent of the highest account value over the prior six years, or 5 percent for an account where there have been no deposits of funds by the taxpayer (such as in the cases of an inherited account) and no withdrawals of funds. Individuals accepted into the voluntary disclosure program will be required to file six years of amended tax returns, back to 2003, reporting all income from offshore bank accounts, and will be required to pay back taxes, interest, and tax penalties. If the individual making the voluntary disclosure served as an executor or advisor and, in that capacity, failed to report the offshore bank account on an estate or gift tax return (apparently within the six-year period), amended estate or gift tax returns will be required to be filed. If the taxpayer is accepted into the voluntary disclosure program, the IRS will agree not to recommend to the Department of Justice that criminal charges be brought.
All U.S. citizens with undeclared accounts containing legal source income are eligible for the voluntary disclosure program unless a criminal or civil investigation of the taxpayer was initiated prior to the voluntary disclosure. In a news release announcing the extension of the deadline to October 15, the IRS warned that "[t]hose taxpayers who do not voluntarily disclose their hidden accounts by the new deadline face much harsher civil penalties, where applicable, and possible criminal prosecution."
Individuals who are considering making a voluntary disclosure to the IRS should consult experienced tax counsel to understand the benefits and risks of the voluntary disclosure process. Blank Rome LLP has significant experience with IRS voluntary disclosure practice and can advise individuals and entities regarding the IRS offshore settlement initiative before it expires on October 15, 2009.
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