We’re speaking about US citizens or residents (and US tax residents can be citizens of any country who happen to stay in the US too long in a given year, with special attention paid to in this blog Canadian citizens who may visit Palm Springs, or Rancho Mirage or Palm Desert long enough for a given year that they are deemed a US tax resident; we are also speaking of citizens of foreign countries who are US green card holders). US citizens and residents must declare to the Department of Treasury their foreign bank accounts (provided they have over $10,000 in aggregate foreign bank accounts/ assets…not a high bar). They must file these information returns (called “FBARs”) by June 30 of each year. Many US citizens and tax residents (particularly those who are current or former citizens of another country) are unaware of the FBAR requirement, which was enacted in 2003. That is why the IRS amnesty programs can be so valuable. In 2012, the IRS is again offering a FBAR amnesty program. This is the third such amnesty program. There is no guarantee there will be a fourth.
Structure of the IRS Amnesty Program Although the IRS has yet to provide (much) specific guidance on the 2012 amnesty program, it will almost certainly follow the framework provided in the 2011 program. So it makes sense to review generally the 2011 program (the “OVDI Program”). Taxpayers who made voluntary disclosures under the 2011 OVDI Program could expect the following penalties/payments:
Path One- the No Questions Asked Path requires the taxpayer to pay 27.5% (for the 2012 program…under the 2011 OVDI Program it was only 25%) of the highest aggregate overseas account balance in the highest year. So if the aggregate overseas account balance in the highest year (when the individual did not file a FBAR) was $2,000,000 (and by the way, when we say highest aggregate overseas account balance we are including the value of overseas assets- such as a house- plus the value of overseas accounts), the individual is volunteering to pay a penalty to the IRS of $550,000 (27.5% x $2,000,000), plus the unpaid income tax (if any), plus penalties for failure to file or pay income tax (if any). So, under Path One, the easy/no risk path, the individual with undeclared overseas accounts (and assets) of $2,000,000 must pay a penalty of $550,000 at an absolute minimum…THIS IS A STIFF AMNESTY PENATLY!!!
Path Two- Opt Out of the 27.5% No Questions Asked Penalty, and Ask the IRS for a Lesser Penalty Path Ahh, this sounds better. Let’s ask for a lower penalty than the 27.5% general amnesty penalty (which required a payment of at least $550,000 for a $2,000,000 overseas aggregate account balance above). But here’s the catch: you can ask the IRS for a lesser penalty, and they might agree (and the individual might end up owing almost nothing to the IRS)…on the other hand, under Path Two, if the IRS doesn’t agree, they can take every penny of your overseas aggregate account balances!!! Quite a gamble under Path Two.
More on the Path Two, and the decision making process which an individual must undertake when deciding between Path One and Two (or not taking part in the amnesty program at all)…in Part III of this series coming up.