IRS Extends Offshore Voluntary Compliance Program and Requires New Reporting of Foreign Assets
The world is shrinking. Overseas connections are expanding. Families are spread across countries and continents. Many people in the U.S. (and U.S. citizens living abroad) are beneficiaries of foreign trusts and estates, and even more seek to invest overseas.
These trends have not gone unnoticed. Congress, the Internal Revenue Service, and other governmental agencies are ramping up enforcement efforts and getting results. The IRS hired approximately 3,300 new agents and tax compliance officers in 2009–2010 alone.
The government and the IRS have made concentrated efforts to seek out and prosecute violators—including both the enablers and the taxpayers—as evidenced by the widely publicized efforts against UBS and more recently, Wegelin & CO, the oldest Swiss private bank. Undoubtedly, there will be more. It is not illegal to hold accounts outside of the United States, and for multiple estate and asset protection purposes, it can be quite prudent to do so. However, these accounts must be reported.
In order to encourage taxpayers who have avoided or ignored required filings in the past, the IRS offered amnesty type programs in 2009 and 2011 which resulted in in 33,000 taxpayers coming forward to comply with the law. In January of 2012 the IRS announced that it has reopened this offshore voluntary disclosure program, providing another opportunity to taxpayers who have failed to file required returns and forms.
U.S. persons have long been required to file IRS tax and information returns if they own or have an interest in foreign accounts or assets, including a:
- Foreign bank or brokerage account
- Foreign corporation, LLC, partnership or trust
- Foreign insurance policy or annuity contract
Or, if any of the following situations apply to them:
- Signature authority over a foreign account
- A beneficial interest in a foreign estate or trust
- Receipt of a gift or bequest from a foreign person
- Contribution to or receipt of a distribution from a foreign trust
Against the backdrop of a shrinking world and burgeoning international connections there has been a concerted push by the U.S. government to ensure that U.S. persons with foreign assets are fully reporting those assets.
FATCA's Fallout
The regulatory landscape changed dramatically after the passage of the Foreign Account Tax Compliance Act of 2010 ("FATCA"). Some of its provisions became effective upon enactment while others are being phased in. There are already new reporting rules in place which apply to the Foreign Bank Account Report ("FBAR").
One of provisions of FATCA that became effective for tax returns due in 2012 requires individuals to report annually their interests in foreign financial accounts and foreign financial assets on the newly introduced Form 8938, Statement of Specified Foreign Financial Assets. This new filing requirement under FATCA is in addition to the information reports that U.S. persons must already file with various federal agencies, including the Internal Revenue Service, in order to disclose foreign accounts and assets.
A Form 8938 must be filed by a "specified individual" (generally, U.S. citizen or resident alien) who has an interest in one or more foreign accounts or financial assets, if the aggregate fair market value of those foreign assets exceeds certain thresholds on the last day of the taxable year or at any time during the year. In many cases, look-through rules apply to individuals by which they are subject to the filing requirement. Beginning with 2012 tax returns, closely-held domestic partnerships and corporations which earn predominately investment income, and some domestic nongrantor trusts, will also be subject to Form 8938 filing requirements.
Offshore Voluntary Disclosure Programs
The IRS's focus on offshore accounts and assets has yielded significant results. The agency has collected more than $4.4 billion so far from the Offshore Voluntary Disclosure Programs announced in 2009 and 2011.
Under these two voluntary disclosure programs, qualifying individuals who had failed to file the proper forms were able to file delinquent income tax and information forms, pay delinquent income taxes as well as a single penalty in lieu of multiple penalties, and could thereby avoid criminal prosecution.
Although the 2011 program expired last fall, the IRS announced in January 2012 that it has reopened its offshore voluntary disclosure program, providing another opportunity to taxpayers who have failed to file required returns and forms, and did not participate in the previous two programs. Unlike the previous programs, there is no set deadline for individuals to apply to the new program. It will be open for an indefinite period (unless otherwise announced).
The success of the disclosure programs offered by the IRS is evidence of the heightened awareness of taxpayers and tax practitioners related to foreign accounts and assets. Dual citizens and others who may not have filed tax forms, but who owe no U.S. tax, have also become aware of the new regulatory landscape. In its announcement of the reopening of the offshore voluntary disclosure program, the IRS mentioned that it is currently developing a process by which these individuals can come into compliance with U.S. tax law.
The Time to Act is Now
With the addition of new Form 8938 for this year, as well as the extension of the voluntary disclosure program, there is no better time than now to review your financial situation to ensure that you are fully complying with IRS and U.S. Treasury filing requirements.
Giordani, Swanger, Ripp & Phillips, LLP is comprised of fourteen lawyers, accountants, and other private client professionals who have decades of experience in U.S. tax compliance for foreign assets, trusts, and entities. GSRP is rated "AV" or "Preeminent" in all of its practice areas by Martindale-Hubbell. GSRP's lawyers are listed among "The Best Lawyers in America," "Texas Super Lawyers," and "Texas Rising Stars."
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