On February 8, 2011, the IRS announced a second amnesty program relating to undisclosed foreign accounts. The “2011 Offshore Voluntary Disclosure Initiative” (“2011 OVDI”) is designed to bring hidden offshore financial accounts and assets back into the U.S. tax system and to help those taxpayers with undisclosed foreign accounts and assets get compliant with their U.S. tax obligations.
All U.S. persons who have a financial interest in or signature authority over foreign financial accounts which in aggregate exceed $10,000 on any day during the year are required to file a Form TD F 90-22.1 (“FBAR”) with the Treasury Department. The penalties for failing to timely file an FBAR are severe: up to the greater of $100,000 or 50% of the account balance for each year the account wasn’t reported on an FBAR. Additional civil and criminal penalties may also apply.
Some of the main provisions of the 2011 OVDI include the following:
- Taxpayers must make voluntary disclosures before the IRS is aware of any noncompliance
- Taxpayers must resolve noncompliance for all applicable years from 2003 through 2010
- Taxpayers must file all amended tax returns and informational returns by August 31, 2011
- Taxpayers must pay all back taxes, plus penalties and interest, including a one-time Offshore Penalty of 25% of the highest aggregate account balance during 2003-2010
Some taxpayers may qualify for a reduced Offshore Penalty. If the maximum balance of a taxpayer’s unreported account(s) in 2003-2010 never exceeded $75,000, a 12.5% Offshore Penalty is available. If the taxpayer did not open the unreported account, and had almost no contact with the account, he or she may be eligible for a 5% Offshore Penalty. Taxpayers who failed to file FBARs, but who reported and paid tax on all taxable income, will not be charged an Offshore Penalty. The same holds true for taxpayers who have reported and paid tax on all income, but who failed to file Forms 5471 (for certain foreign corporations) or Forms 3520 (for foreign trusts and large gifts and inheritances).
The IRS indicated that the 2011 OVDI will be the last, best chance for individuals to substantially reduce their exposure to significant civil penalties and, in many cases, to eliminate the risk of criminal prosecution.
Following the announcement of the 2011 OVDI, the organization that has authority over the FBAR regulations made some clarifications to those rules. The Financial Crimes Enforcement Network (“FinCEN”) issued on February 23, 2011, a final rule amending the Bank Secrecy Act, which includes the FBAR rules. The final regulations provide definitions to certain terms in the FBAR rules that will help taxpayers properly file FBARs. Some of the main issues addressed by the final rule include the scope of taxpayers who are required to file FBARs and the types of reportable accounts. One of the important new clarifications relates to the definition of “signature or other authority.” As mentioned above, taxpayers may need to file an FBAR if they have signature authority over, but no financial interest in, a foreign financial account. In its final rule, FinCEN stated:
“Signature or other authority means the authority of an individual (alone or in conjunction with another) to control the disposition of money, funds or other assets held in a financial account by direct communication (whether in writing or otherwise) to the person with whom the financial account is maintained.”
Last year, the IRS issued a Notice providing an extension of the FBAR filing requirement for taxpayers who had a signature authority over, but no financial interest in, a foreign financial account. These taxpayers have until June 30, 2011 to file any necessary FBARs for 2010 and prior years.
The Wolf Group helped many clients make voluntary disclosures under the 2009 Offshore Voluntary Disclosure Program. We work with several tax attorneys who are very knowledgeable and experienced in these matters to prepare prior year income, gift, and estate tax returns; informational filings (including those for foreign corporations and foreign trusts); and FBAR forms. If you think that you might have an FBAR or other international tax compliance issue, or if you have any questions related to this article, please feel free to contact our Tax Director, Dale Mason, at firstname.lastname@example.org or at 703-502-9500.
This newsletter is for informational purposes only. It should not be construed as tax, legal, or investment advice. Information has been gathered from sources believed to be reliable, but individual situations can vary and you should consult with your investment, accounting and/or tax professional.
ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN BY THE WOLF GROUP TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN.