IRS AMNESTY FOR FAILURE TO REPORT OVERSEAS ACCOUNTS (FBAR)

Information about IRS Amnesty for Failure to Report Overseas Accounts (FBAR) and the 2012 Offshore Voluntary Disclosure Initiative (OVDI):

The IRS and other organizations of the U.S. Government are currently engaged in efforts to bring taxpayers who have used undisclosed foreign accounts and undisclosed foreign entities to avoid or evade tax into compliance with United States tax laws.

Background

Under the U.S. Department of Treasury FBAR regulations, “United States persons” are required to file an annual FBAR if:

1. The United States person had a financial interest in or signature authority over at least one financial account located outside of the United States; and 
2. The aggregate value of all foreign financial accounts exceeded $10,000 at any time during the calendar year to be reported. 

“United States persons” means United States citizens; United States residents; entities, including but not limited to, corporations, partnerships, or limited liability companies created or organized in the United States or under the laws of the United States; and trusts or estates formed under the laws of the United States. 

Important: The term “United States residents” includes U.S. citizens working abroad, green card holders, and other U.S. visa workers employed anywhere in the world; as well as visitors to the U.S. if they meet certain residency qualifications. This latter category includes many people in the Miami area who qualify as “resident taxpayers” and must report, for U.S. tax purposes, their worldwide income.

This means, for example, if you are “visiting” here from, say, Venezuela, and you have a bank account in Caracas, you qualify as a resident taxpayer just by spending six months in the U.S., and you must report your offshore bank accounts.

The question about FBAR arises on Schedule B of Form 1040, and the report has to be mailed to the Department of the Treasury by June 30 of each year. Even if the taxpayer does not complete a Schedule B, he or she is still expected to know about the above requirements.

Penalties for perjury on Schedule B and/or not submitting the FBAR on time can be extremely punitive, and criminal sanctions can apply. Failure to comply with these regulations constitutes a breach of the Bank Secrecy Act, and Homeland Security will be apprised of each offense. 

IRS Actions to Ensure Compliance

In the 2009 Offshore Voluntary Disclosure Program, some 15,000 taxpayers entered the program before it ended on Oct. 15, 2009, and another 3,000 came in late but were accepted. This program was relatively lenient compared to the 2011 and 2012 programs, which are supported by a host of information gathering initiatives, and slightly higher interest penalties.

We generously call this an “amnesty,” but there is nothing forgiving about it. If you had overseas accounts for any year between 2003 and 2011 that you have not reported, then run, don’t walk, to an international tax attorney and get an initial filing lodged A.S.A.P. If you do not, you may be looking at huge fines, confiscation of all the money in your overseas accounts, attachment of your U.S. income, loss of your U.S. assets – and significant prison time. 

This initiative enables noncompliant taxpayers to resolve their tax liabilities and minimize their chances of criminal prosecution. When a taxpayer truthfully, promptly, and completely complies with all provisions of the voluntary disclosure practice, the IRS will not recommend criminal prosecution to the Department of Justice.

The Process
Entering successfully in the 2012 OVDI requires completion of three stages, all done through your attorney:

Stage I – Pre-Clearance
Your attorney will fax a Power of Attorney on your behalf to the IRS Criminal Investigation Lead Development Center in Philadelphia requesting a pre-clearance for you to enter the program. A positive response should indicate that a civil examination of your tax affairs has not been initiated already and/or that you are not already under criminal investigation.

The IRS warns that pre-clearance does not guarantee a taxpayer’s acceptance into the 2012 OVDI. Taxpayers must continue to truthfully, promptly, and completely comply with all provisions of the 2012 Offshore Voluntary Disclosures Initiative.

If a negative response is received, this is a warning that something positive needs to be done. Your attorney will attend to that by immediately contacting local IRS Criminal Investigation.

Stage II – Pre-Clearance – Request for Initial Data
With a positive response in hand, we have 30 days to complete and submit the “Offshore Voluntary Disclosures Letter” to the OVDI coordinator, also in Philadelphia. This “letter” is actually a multi-page document briefly outlining the years and amounts that you have held offshore, the reasons for it, and background as to potential tax liability. Although this sounds tedious, we have procedures in place to start accumulating that material from the moment we commence Stage I. Whatever the result of the Stage I application, we are going to need that data to assist you.

The IRS will review the letter and notify us by mail whether the voluntary disclosure has been preliminarily accepted or declined. Provided we have been truthful and complete in this outline, then there is no reason to expect a problem at this stage.

Stage III - Complete Voluntary Disclosure Package
Depending on your offshore history, the amounts involved, and several other factors, we will now complete a detailed updating of FBAR reporting and tax for the years in which you had overseas accounts. For this exercise, we will employ financial experts to ensure the reporting is accurate but does not overstate your position.

You should also start gathering all of your foreign account statements and other documentation for all of the years covered by your voluntary disclosure.

The Risks
The IRS remains actively engaged in ferreting out the identities of those with undisclosed foreign accounts. Moreover, this information is increasingly available to the IRS under tax treaties and through submissions by whistleblowers, and it will only become more available as the
IRS, Homeland Security, the Department of Justice, the U.S. Treasury, the FBI, and other organs of the U.S. government are actively engaged in a coordinated effort to control the worldwide reporting of foreign financial assets controlled by American persons. The scope of control these agencies now have is considered by many to be overreaching and internationally unprecedented.

Activities include:
Foreign Account Tax Compliance Act (FATCA), enacted in 2010 as part of the Hiring Incentives to Restore Employment (HIRE) Act. The legislative intent of FATCA is to ensure there is no gap in the ability of the U.S. government to determine the ownership of U.S. assets in foreign accounts, but it is obviously part of a huge initiative to help balance the budget. FATCA becomes fully effective in January 2013, but the effects are being felt already. 

Alongside foreign banks, FATCA also affects brokers, investment companies, and fund structures – an estimated 50,000 to 100,000 financial intermediaries worldwide. Other financial market participants, such as stock exchanges and clearing houses, must also deal with FATCA. Banks and other financial institutions must decide whether they want to continue providing services to U.S. persons as direct or indirect customers and whether U.S. securities are part of their product portfolio and proprietary trading. If so, an agreement has to be signed with the IRS. The identification of U.S. persons is very challenging because not only are U.S. citizens and persons residing in the U.S. included in this group, but so are green card holders or persons who have stayed in the U.S. for several consecutive days during the past three years, thus meeting the “substantial presence test.”

This is causing large numbers of overseas banks to ask their U.S. account holders to move their accounts (to where?), and more and more international banks will no longer do business with Americans.

Whistleblowers
This IRS program is in full swing and there have been substantial convictions and fines during the past few months. 

Attack on Major Banks
A 2009 attack on Swiss giant UBS yielded a fine of $780 million and the release of 4,500 U.S. account-holder names to the IRS. The Department of Justice had accused UBS of aiding U.S. account holders evade as much as $20 billion of combined U.S. income tax.

At a time when Treasury estimates that two-thirds of all U.S. currency resides overseas, one can understand the government’s interest in repatriating illegal monies that could help shore up the domestic economy. 

Currently, HSBC is a major target, especially since it has a large network of banks in the U.S. (making them susceptible to asset-freezing) and the government has issued a “Joe Doe Summons” on HSBC India. This has already yielded Indian-American convictions and fines.


The Benefits
Benefits include prison avoidance and the ability to bring your foreign bank accounts back to the U.S. while remaining in compliance. Even after paying fines and back taxes, you can spend your money in comfort and sleep well at night. And, when the time comes, you can leave it to your heirs. Who wants to inherit an offshore illegal bank account – and possibly go to prison for it?

If you are facing possible tax challenges, you need an experienced and helpful lawyer who stays abreast of changing taxation laws and can help you secure your financial future. Our lawyers have experience and expertise in accounting, bankruptcy, and tax law, and are admitted to the United States District Court, the United States Tax Court, and the United States Supreme Court. They are qualified to represent you before the IRS in any matter, including assistance in repatriating funds from foreign bank accounts, asset protection trusts, and stockbrokers.