Persons qualifying as U.S. resident aliens and those U.S. citizens with foreign bank accounts and other foreign financial holdings need to be aware that the IRS’ voluntary disclosure program for offshore assets is coming to a close. The IRS has been offering this voluntary disclosure program in various forms since 2009, but it is now slated to officially terminate on September 28, 2018.
This program provides noncompliant taxpayers the opportunity to disclose previously hidden foreign accounts and assets used to avoid or evade United States tax obligations. The program specifically enables the taxpayer to: 1) become compliant with the U.S. tax requirements; 2) prevent the imposition of substantial civil penalties; and 3) eliminate the risk of criminal prosecution against the taxpayer for failing to file Foreign Bank and Financial Accounts Reporting (“FBAR”) forms.
Current tax law requires U.S. citizens and certain U.S. residents to annually report their direct or indirect financial interests, or signature authority, over an account maintained with a financial institution located in a foreign country, if the aggregate value of all foreign financial accounts exceeds $10,000 at any point during the tax year. A taxpayer becomes subject to the FBAR requirements even if they only obtain signature authority over foreign bank accounts, savings accounts or stock brokerage accounts for only one day. Taxpayers can unknowingly become subject to these rules if they transfer funds to buy a car in a foreign country, become appointed as an executor of a foreign estate of a relative or friend, or stand as a beneficiary of a decedent who had foreign accounts.
The civil penalty for failure to comply is the higher of $100,000 or 50% of the account value, per violation. If the taxpayer can show non-willful violations due to reasonable cause, the penalty may be reduced to $10,000 per violation. Egregious violations, if proven, may subject the taxpayer to criminal prosecution under several different theories, including tax evasion, filing false returns, failure to file mandated returns, and conspiracy to defraud the government. Criminal convictions may result in a prison sentence (up to 5 years) plus additional fines ranging up to $250,000 upon the taxpayer.
Individuals, corporations, partnerships, and trusts are all eligible to participate in the voluntary disclosure program unless the IRS has already initiated any civil or criminal examination against the taxpayer. Generally, a condition of participation is the ability to pay full restitution to the IRS for back taxes, interest and some civil penalties. However, if a taxpayer is unable to generate the necessary funds to make restitution, they may be able to establish a payment plan with the IRS.
If you or your business have foreign financial interests and you have not been compliant with the FBAR filing requirements, you are encouraged to contact one of our tax attorneys immediately. We can assist you with the voluntary disclosure program while the option is still available. Further, our consultations are protected by the attorney-client privilege. Be aware that because conversations with your CPA do not share this same protection under Ohio law, you should always contact your attorney first. We are happy to review your specific situation and assist in crafting the best path forward to avoid a severe and complicated battle with the IRS.