In my previous blog, I indicated that this is an area getting a tremendous amount of attention from the IRS and they are intent on obtaining taxpayer compliance. In an effort to induce this compliance, voluntary disclosure programs have been initiated over the last few years and we are coming upon the deadline of the most recent one.
To the contrary, if a taxpayer previously reported and paid the tax associated with their foreign accounts, they should not use this program to voluntarily disclose. These taxpayers should file the delinquent FBAR reports and attach a statement explaining why the reports are being filed late. The IRS will not impose a penalty for failure to file the delinquent FBARs if there are no underreported tax liabilities and the FBARs are filed by August 31.
If a taxpayer did not report the foreign income, they must follow the procedures below to become compliant -
(1) Provide copies of previously filed original (and, if applicable, previously filed amended) federal income tax returns for tax years covered by the voluntary disclosure;
(2) Provide complete and accurate amended federal income tax returns (for individuals, Form 1040X, or original Form 1040 if delinquent) for all tax years covered by the voluntary disclosure, with applicable schedules detailing the amount and type of previously unreported income from the account or entity (e.g., Schedule B for interest and dividends, Schedule D for capital gains and losses, Schedule E for income from partnerships, S corporations, estates or trusts);
(3) File complete and accurate original or amended offshore-related information returns -Form TD F 90-22;
(4) Cooperate in the voluntary disclosure process, including providing information on offshore financial accounts, institutions and facilitators, and signing agreements to extend the period of time for assessing tax and penalties;
(5) Pay 20% accuracy-related penalties on the full amount of underpayments of tax for all years;
(6) Pay failure to file penalties;
(7) Pay failure to pay penalties;
(8) Pay, instead of all other penalties that may apply, including FBAR and offshore-related information return penalties, a miscellaneous Title 26 offshore penalty, equal to 25% of the highest aggregate balance in foreign bank accounts/entities or value of foreign assets during the period covered by the voluntary disclosure;
(9) Submit full payment of all tax, interest, accuracy-related penalty, and, if applicable, the failure to file and failure to pay penalties with the required submissions set forth in or make good faith arrangements with IRS to pay in full, the tax, interest, and these penalties and
(10) Execute a Closing Agreement on Final Determination Covering Specific Matters, Form 906.
It should be noted that taxpayers who are under either a civil examination or a criminal investigation are not eligible for this program. The IRS has dedicated a tremendous amount of resources to identify those taxpayers with undisclosed foreign accounts and income. If you have a client that has been lax about this reporting or has been considering becoming compliant, now is the time. I have personal experience with a client that failed to supply the information to his accountant and now faces jail time. As I indicated in my previous blog, FBAR is serious business and we need to make sure our clients are aware of the severity of the penalties and possible criminal prosecution for not reporting.