Offshore Account Voluntary Disclosure Opportunity May Ameliorate Potentially Draconian Penalties
On March 26, 2009, the IRS announced a new amnesty program for U.S. persons with undisclosed foreign financial accounts. This announcement coincides with the IRS Strategic Plan for 2009-2013 in which the IRS has made offshore tax compliance a matter of highest priority and signals an end to the existing Last Chance Compliance Initiative that previously allowed taxpayers to come clean on foreign accounts with reduced penalties. This initiative is the latest development in the government’s increasingly aggressive enforcement campaign aimed at reducing tax evasion, money laundering and financial information reporting noncompliance.
As we previously explained in our June 20, 2008 Troutman Sanders Advisory on Reporting of Foreign Accounts, U.S. persons are required to report on their individual tax returns any financial interest in or signature authority over any foreign financial account with an aggregate value in excess of $10,000. Additionally, a U.S. person who owns (or has signature authority with respect to) a foreign account generally must file a separate form, the U.S. Treasury Department Form TD 90-22.1, commonly known as the “FBAR.” A foreign financial account for purposes of this FBAR reporting requirement includes not only offshore bank accounts, brokerage accounts and trusts, but also foreign mutual funds plus debit and prepaid credit cards issued in countries governed by bank-secrecy laws.
Generally, the failure to report taxable income to the IRS could potentially result in the imposition of civil penalties, including the civil fraud penalty of 75 percent of the amount of any tax deficiency attributable to fraud, as well as criminal tax violations involving tax evasion and the filing of a false tax return. U.S. persons with interests in undisclosed offshore financial accounts could face additional penalties even where the foreign financial arrangement does not generate any income.
In addition to a civil fine in an amount potentially exceeding the balance of the foreign account, if a U.S. person’s noncompliance with the FBAR requirements is ultimately deemed to be “willful,” a taxpayer could be subject to a criminal fine of up to $250,000 and/or imprisonment of up to five years. FBAR violations that are not considered to be “willful” may result in a civil fine of up to $10,000.
Participation in the new IRS voluntary disclosure program may eliminate the possibility of criminal prosecution with respect to unreported offshore financial accounts and reduce potential civil penalty exposure. Taxpayers will be able to avail themselves of the new program if they “come clean” to the IRS by September 23, 2009.
Taxpayers who voluntarily disclose the existence of their offshore accounts under the new program will be required to pay the following:
- All taxes and related interest attributable to the newly-reported foreign accounts going back six years.
- A 25 percent “delinquency” (or 20 percent “accuracy” penalty) which will be imposed on any tax deficiency resulting from the previously undisclosed accounts.
- A separate 20 percent “account balance” penalty (intended as substitute for the FBAR penalty) will apply to the total balance of all the foreign bank accounts or assets in a foreign entity during the year among the past six years in which the accounts had their highest aggregate value. This 20 percent account balance penalty may be reduced to 5 percent in cases where specific facts exist.
Although the new voluntary disclosure program contains a “significant” penalty framework—as characterized by IRS Commissioner Douglas Shulman—those taxpayers who take advantage of the short-term program will be able to avoid potential criminal tax violations and a 75 percent civil fraud penalty by paying a 20 percent account balance penalty.
If you would like more information about the new IRS voluntary disclosure program, please contact Bryan B. Lavine of our White Collar and Government Investigations Group or Mark A. Goldsmith of our of Tax Group.