While you’d never know it reading recent headlines describing IRS targeting of conservative “Tea Party” type groups, a much larger IRS effort is underway to identify U.S. persons who have failed to disclose reportable and possibly taxable non-U.S. investments.
Thanks to a recent report from the General Accountability Office (GAO) urging the IRS to crack down even harder, this effort will likely soon expand. U.S. citizens or permanent residents with unreported offshore accounts face an increasingly high likelihood of discovery.
By way of background, a U.S. law with the misleading name of the “Bank Secrecy Act” requires all U.S. citizens—no matter where they reside—to report all foreign “bank, securities, or ‘other’ financial accounts” with an aggregate value exceeding $10,000. All U.S. permanent residents (green card holders) must also abide by the same requirements, even those not currently residing in the United States.
You make this report on Form TD F 90-22.1 (the "foreign bank account reporting" or "FBAR" form). Reporting is required even if the accounts contain only precious metals or other non-cash assets, or generate no income. The deadline for filing is June 30 for foreign accounts held the previous year. While this requirement has existed since 1970, only in recent years has the IRS started to enforce it vigorously.
The penalties for non-compliance with the reporting regime can be draconian. You can be fined $10,000 per unreported account for each year you neglect to file the FBAR, although the sanction for a "negligent violation" is only a $500 fine. The IRS may decline to impose a civil penalty if there was reasonable cause for the delay and you later reported the account. An exception may also apply you properly reported all income from the account(s) on your income tax returns.
If you "willfully" fail to file the form, you face a fine up to $500,000, loss of 50% of the value of the highest aggregate value of the accounts, and imprisonment up to five years. This may be easier to prove than you might think. A 2012 federal appeals court concluded that a U.S. person with an unacknowledged offshore account could be found to have willfully failed to declare that account merely by signing a U.S. tax return.
The IRS has long believed that hundreds of thousands and perhaps millions of Americans fail to file FBAR forms. Beginning in 2001, it carried out a series of initiatives to pressure U.S. offshore account holders into reporting these relationships. Simultaneously, it also sought to force offshore banks to disclose financial relationships with U.S. account-holders. For instance, in 2009, Swiss banking giant UBS AG agreed to pay a $780 million fine and turn over account details on thousands of U.S. depositors suspected of holding undeclared assets to the IRS.
At the same time, the IRS held out a “carrot,” if you will, in the form of a series of initiatives that offered reduced penalties and no jail time to U.S. taxpayers who voluntarily disclosed previously unreported offshore accounts. More than 39,000 taxpayers have participated in four such “voluntary disclosure” programs beginning in 2003, and paid more than $5.5 billion to the IRS for the privilege of not facing criminal penalties.
However, a much larger number of what the IRS calls “recalcitrant” account-holders chose another route. Instead of entering a voluntary disclosure program, they simply started reporting their foreign accounts, without paying penalties or interest. Such taxpayers avoid paying any delinquent taxes, interest, or penalties, unless audited. The IRS calls this practice “quiet disclosure.”
Evidence of an explosion in quiet disclosures comes from the fact the number of people filing FBAR forms nearly doubled from 281,000 in 2007 to 516,000 in 2010. The GAO believes that the IRS may be missing efforts by these taxpayers attempting to circumvent paying the taxes, interest and penalties that would otherwise be owed. The agency has urged the IRS to examine closely these first-time filers for disclosure violations in earlier years. And, the IRS has promised to do just that. You can download the report here.
If you’re in this situation—or if you haven’t made any attempt to comply with these rules—consult with a qualified tax attorney (not an accountant). This arrangement provides attorney-client privilege for your discussions. The tax attorney can then retain an accountant to prepare the necessary returns, and decide whether you should participate in the latest voluntary disclosure initiative.
Copyright © 2013 by Mark Nestmann
