Penalties for offshore assets disclosed

The IRS has issued a memorandum describing the penalty framework that will apply to those who voluntarily disclose assets hidden in offshore accounts. The new program is a followup to voluntary disclosure efforts conducted two years ago.

Every U.S. citizen who has a financial interest in, or signature authority over, at least one financial account located outside the United States, and have an aggregate value of all foreign financial accounts that exceeded $10,000 at any time, must file Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts, commonly known as an FBAR.

Generally, the civil penalty for willfully failing to file an FBAR can be as high as the greater of $100,000 or 50 percent of the total balance of the foreign account, per violation. Fraud penalties can be as high as 75 percent.

In 2009, the IRS announced a settlement offer for those who voluntarily disclosed unreported offshore income for calendar years 2003 through 2008. Those complying with the terms of the 2009 program had to pay back taxes and interest, plus an accuracy or delinquency penalty. They also had to pay an additional penalty of 20 percent of the amount in the foreign bank accounts in the year with the highest aggregate account or asset value.

However, those who came forward on a timely basis did not face criminal prosecution. The original deadline was Sept. 23, 2009, which was later extended to Oct. 15, 2009.

Last month, the IRS announced a second offer for those with undisclosed income from hidden offshore accounts for the 2003 through 2010 period. The terms of the new offer are similar to those that applied for the first offer, but the penalty structure is different. The general rule is that the additional penalty is 25 percent based on amounts in foreign bank accounts, but it could be lower.

For taxpayers that make voluntary disclosure and fully cooperate with the IRS, the settlement terms will be as follows:

  • All taxes and interest due for 2003 through 2010 must be paid. Amended returns, including information returns and FBARs, must be filed.
  • An accuracy-related penalty will apply to all years (with no reasonable-cause exception allowed), and failure-to-file and failure-to-pay penalties will apply, where applicable.
  • An additional penalty equal to 25 percent of the amount in foreign financial accounts/entities and the value of foreign assets acquired with untaxed funds or producing untaxed income in the year with the highest aggregate account/asset value will be assessed.

The 25 percent penalty is reduced to 12.5 percent if the highest aggregate account/asset value is less than $75,000. The penalty is reduced to 5 percent under either of the following conditions:

The taxpayer:

  • Did not open or cause the account to be opened; and
  • Exercised minimal, infrequent contact with the account; and
  • Did not withdraw more than $1,000 from the account in any year; and
  • Can establish that all applicable U.S. taxes have been paid on funds deposited to the account;

or if the taxpayer:

Was a foreign resident who was unaware that he or she was a U.S. citizen.

Those who participated in the 2009 program who believe the facts of their case qualify them for the 5 percent or 12.5 percent reduced penalty criteria, but who paid a higher penalty under the original settlement agreement, may be able to apply for a refund.

The new voluntary disclosure period ends Aug. 31, 2011. More details on the program can be found on the IRS website, here.

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