IRS Crackdown on Foreign Account Reporting

Jerry Schmit, Tax Senior Manager   email
August 2009

• Do you own a bank account in a foreign country?
   
• Do you have signature authority over a bank account in a foreign country or own a life insurance policy issued by a foreign company?
   
• Is the aggregate total of these accounts greater than $10,000?

If so, you have an annual Foreign Bank and Financial Accounts Report (FBAR) filing requirement with the IRS. Additionally, any income earned from these accounts should be reported on the owner's income tax return. Non-compliance with the FBAR filing and income tax reporting may result in civil penalties of up to $100,000 per year and possible criminal prosecution.

The IRS has requested foreign banks to provide a list of United States taxpayers with accounts owned in foreign countries to assist the IRS with its identification of non-compliant taxpayers. The IRS’s goal is to end the practice of sheltering income in offshore accounts.

While these rules have been in place for years, the IRS has recently expanded efforts to inform taxpayers about these reporting requirements and increased enforcement. The IRS is offering a “voluntary disclosure program” for taxpayers with undisclosed offshore accounts. The program allows taxpayers to become compliant with the law while avoiding the substantial penalties mentioned above. Additionally, the risk of criminal prosecution is generally eliminated (note: the IRS cannot guarantee the avoidance of criminal prosecution, but will recommend against it). This program is only available through September 23, 2009. After that date, the IRS may not allow for penalty abatement and may recommend criminal prosecution.

The voluntary disclosure program requires the taxpayer: (1) to file amended income tax returns for the previous six years for any unreported offshore income; and (2) to file delinquent FBARs for the last six years. Any additional income tax reported on the amended tax returns will be subject to interest and penalties. Additionally, a 20 percent penalty on the highest balance of the account(s) in the six year period will also apply. This 20 percent penalty will in most cases be much lower than the civil penalties, but it will not exceed the civil penalties.

If you are the owner of a foreign bank account, or if you have signature authority over a foreign account, please contact your Kolb+Co. adviser to discuss possible filing requirements.