If you have a foreign bank or investment account, that may be a ticking tax bomb waiting to explode. If the aggregate balance of all foreign accounts exceeds $10,000 at any time during the year, a Report of Foreign Bank and Financial Accounts (FBAR) must be filed. Also, any income from those accounts must be reported on your income tax returns, even if you already reported the income on a foreign tax return and paid that country’s taxes on the income. The penalties for failure to do so can be draconian. In recent years, the IRS has stepped up efforts to discover the owners of such accounts, and has begun to target taxpayers and impose substantial civil and criminal penalties.
Recently, IRS has announced agreements by a number of foreign institutions, long treated as “tax havens”, to disclose the information on all accounts owned by US citizens. Although recently publicized convictions dealt with large, multi-million dollar accounts, any account and unreported income is vulnerable to the same stiff penalties.
Currently, the IRS has an amnesty program that can limit the possible penalties and enable a delinquent taxpayer to “come clean” with a less onerous burden. The IRS 2011 Offshore Voluntary Disclosure Initiative enables the taxpayer to file all missing FBARs, report any unreported income, pay all taxes and some penalties and interest, but then the matter is finished and there is no need to continually worry whether your financial institution will be the next to deliver account information to the IRS.
This Initiative has certain rigid requirements and a considerable amount of documentation required to be accepted for the amnesty, including required FBARs and amended tax returns for 2003-2010, and the payment of a 20% penalty on unpaid taxes and a FBAR penalty of 25% of the highest amount disclosed on the FBARs. Also, all of the required documentation, plus payment of all taxes, interest and penalties (or at least acceptable arrangement of payment), must be submitted and accepted by August 31, 2011, with no possibility of extension. However, the potential penalties for failure to comply with FBAR reporting requirements can range from $10,000 to the greater of $100,000 or 50% of account value for each FBAR not filed, plus possible criminal penalties, which could make the Initiative requirements appear mild by comparison.