US Tax Residents- Have You Failed to Report Your Foreign Bank Accounts? IRS Offers a 2012 Amnesty Program, But It's Tricky (Part I)

February 6, 2012
By Michael Brooks on February 6, 2012 1:17 PM |

In January, the Internal Revenue Service reopened the offshore voluntary disclosure program to help people hiding offshore accounts get current with their taxes. Although details of the 2012 program were not immediately available, the parameters will likely be very similar to the 2011 Offshore Voluntary Disclosure Initiative ("OVDI"). While 2011 OVDI Program seemed straight-forward, it turned out it was anything but straight-forward.

US Citizens or Tax Residents Must File a FBAR Annually

US tax citizens or residents must file a "FBAR" (a "Report of Foreign Bank and Financial Accounts") annually, provided the US citizen or tax resident has over $10,000 in financial account(s) which are not located in the United States. The term financial account is broadly defined and includes any bank, securities derivatives, or other financial instrument accounts. It also includes any savings, demand, checking, deposit, or other account maintained with a financial institution in addition to certain annuity and life insurance contracts, commodities and precious metals and safe deposit accounts. The FBAR is filed on a US Treasury Form TD F 90-22.1. The FBAR is filed with the US Department of Treasury by June 30 of the year after the US citizen or resident had a non-US account. The FBAR requirement has been in existence since 2003.

2012 Program Will Likely Be Similar to the 2011 Program

Although the IRS has yet to provide details, it's a fairly safe assumption that the 2012 will look very similar to the 2011 OVDI Program. So, for taxpayers who went through the 2011 OVDI Program, what were the penalties?

Non-Willful Failure to File a FBAR

The general penalty for a "non-willful" failure to file a FBAR for a given year is $10,000 per year.

Willful Failure to File a FBAR
A willful failure to file a FBAR is far more significant. In the case of a willful failure to file a FBAR, the penalty can be as high as 50% of the aggregate balance of the overseas account(s) per year. This is steep. Let's look at this example published last year by the IRS in their 2011 Offshore Voluntary Disclosure Initiative Frequently Asked Questions and Answers (Q&A 8):

We start with an account balance in 2002 or $1,000,000

Year Interest Income Account Balance
2003 $50,000 $1,050,000
2004 $50,000 $1,100,000
2005 $50,000 $1,150,000
2006 $50,000 $1,200,000
2007 $50,000 $1,250,000
2008 $50,000 $1,300,000
2009 $50,000 $1,350,000
2010 $50,000 $1,400,000

If the taxpayers didn't come forward, when the IRS discovered their offshore activities, and the IRS deemed the failure to file "willful", they would face up to $4,543,000 in tax, accuracy-related penalty, and FBAR penalty. The taxpayers would also be liable for interest and possibly additional penalties, and an examination could lead to criminal prosecution.

The civil liabilities outside the 2011 Offshore Voluntary Disclosure Initiative potentially include:

FBAR penalties totaling up to $4,375,000 for willful failures to file complete and correct FBARs (2004 - $550,000, 2005 - $575,000, 2006 - $600,000, 2007 - $625,000, 2008 - $650,000, and 2009 - $675,000, and 2010 - $700,000),

So, if the IRS deemed the failure to file a FBAR was willful in this case, the IRS could impose a penalty of $4,543,000, even though the taxpayer's account was only as high as $1,400,000 (i.e., the penalty is 3 times higher than the highest overseas aggregate account value)!!!

We discuss what constitutes a willful failure to file, and what the 2012 amnesty program offers taxpayers, in future posts. But the key take-away for US citizen/residents with foreign bank accounts is: you better participate in the 2012 amnesty program, because the possible penalties for not filing FBARs are huge.