There is still time for taxpayers who have failed over the years to report income in foreign bank accounts to participate in the Internal Revenue Service’s (IRS) Voluntary Disclosure program. Taxpayers who have not filed Forms 90-22.1 (FBAR reports) and come forward voluntarily will pay lower interest and penalties on their back taxes and can avoid tax avoidance penalties if they meet the filing deadline of September 23. Penalties and interest under FBAR rules are severe and can amount to more than twice the value of the account.
Turnaround time is fast for applications, Reuters reports
. The IRS has been issuing conditional approval based on verification of a client’s passport or Social Security number, and a signature saying that no income has come from illegal sources, says Steven Mopsick, an attorney who worked for the IRS for 30 years. Mopsick said he is getting a three-day turnaround when he submits information to the IRS for the amnesty program.
Among those who can take advantage of the amnesty are the 4,450 individual taxpayers who, following an August court decision, may be receiving notices from UBS that their account information has been released to the IRS. They are eligible to participate in the amnesty programs, even if they have already received their notice, according to the IRS. Taxpayers with accounts in other foreign banks should also take advantage of the Voluntary Disclosure program, Reuters reports, because IRS officials have said other foreign banks, including HSBC Holdings PLC, Credit Suisse Group AG, and banks in the Cayman Islands, are being queried for possibly helping the wealthy evade taxes.
When he announced the Voluntary Disclosure program
in March, IRS Commissioner Douglas Shulman stressed the IRS’s commitment to pursuing taxpayers with unreported foreign income. “As we continue to step up our international enforcement efforts, this is a chance for people to come clean on their own. Our guidance to the field is for the next six months only, after which we will re-evaluate our options.”
Those who come in voluntarily will get a fair settlement, Shulman said. “We set up a penalty framework that makes sense for them -- they need to pay back-taxes and interest for six years, and pay either an accuracy or delinquency penalty on all six years. They will also pay a penalty of 20 percent of the amount in the foreign bank accounts in the year with the highest aggregate account or asset value. Just to be clear, this is 20 percent of the highest asset value of an account anytime in the past six years. This gives taxpayers -- and tax practitioners -- certainty and consistency in how their case will be handled.”
The IRS provides an example of what could happen to a foreign bank account holder who comes forward by September 23 compared with the potential outcome under current FBAR penalties if the account holder does not come forward and the IRS discovers the existence of the account.
If a taxpayer with an account with an initial deposit of $1 million on which the taxpayer has earned $300,000 comes forward and the IRS accepts the voluntary disclosure, that taxpayer would pay $386,000 plus interest. This includes:
· Tax of $105,000 (six years at $17,500) plus interest,
· An accuracy-related penalty of $21,000 (i.e., $105,000 x 20 percent), and
· An additional penalty, in lieu of the FBAR and other potential penalties that may apply, of $260,000 (i.e., $1,300,000 x 20 percent).
If the same taxpayer doesn’t come forward and the IRS discovers the offshore activities, the taxpayer faces up to $2,306,000 in tax, accuracy-related penalty, and FBAR penalty, nearly twice the value of the account. The taxpayer would also be liable for interest and possibly additional penalties, and an examination could lead to criminal prosecution.
Federal tax penalties may be only the first shoe to drop for taxpayers with undisclosed foreign bank accounts. In Connecticut, where UBS AG has its U.S. headquarters, Attorney General Richard Blumenthal is seeking information from the federal government into whether any of the 4,450 UBS accountholders whose identities will be revealed to the U.S. may have evaded state taxes.
Taxpayers wanting to participate in the IRS voluntary disclosure process should call the phone number associated with the state in which they reside. See Contact IRS About Voluntary Disclosure