July 12, 2009
By Donald S. Paris, CPA, MST
U.S. deficits continue to generate new ways for the IRS to find new revenue sources; and this time there are huge penalties for failing to comply with the IRS new rules on owning a foreign bank account. So, if your accountant starts probing about any such accounts, be very attentive. You see, if you have an interest in or signature authority over an account in a financial institution in a foreign country during the year where the aggregate exceeds $10,000, you need to report it to the U.S. Treasury Department. Normally, this is done by filing a Form TD 90-22.1 Report of Foreign Bank and Financial Accounts, by June 30th of each year. If you can believe it, this form is called FBAR (not to be confused with a similar acronym). Even though this client had been praising my service and advice given, they conveniently found another accountant as I asked them for the information needed to prepare this form. As I said, one of the worst reasons for changing accountants.
Because this is such a huge area for the IRS to deal with, they have temporarily offered leniency on the penalties for failure to report and disclose this information. This is huge for the IRS, because U.S. taxpayers are supposed to report their worldwide income, and this is one of the areas the IRS looks toward to help find all that income. So, the temporary offer is leniency on the penalties if you report the accounts under this new program which ends September 23, 2009. Failure to report could have huge implications to you, if you are caught. The penalties include the greater of 50% of the total balance of the foreign account, or $100,000. By the way, this is only one of the penalties associated with this issue. And let’s not forget that there could be a threat of criminal prosecution. The statute of limitations on the assertion of these penalties is six years from the date of the violation, with five years for criminal prosecution. And we cannot forget that the statute of limitations for failure to file a tax return, or for tax evasion due to the lack of reporting income from offshore accounts is six years from the later of the due date of the return, or the last affirmative act of evasion. Yup, they got you. So, faced with a penalty where the amount could actually exceed your account balances, you bet I will always recommend a client disclose the foreign accounts.
Just to make sure they have duly dealt with this issue with the accord of a pugilist, taxpayers who have unreported income from foreign accounts, who have not been contacted by the IRS or are under criminal investigation or civil examination, should contact the IRS’s Special Agent In Charge of the local IRS Criminal Investigation Division. Yes people, they really want those of you who really don’t believe them, to contact the Criminal Investigation Division. Oh, and by the way, if you decide to comply with the law after you get a letter from the IRS dealing with this issue, they will take no pity on you. It is now too late.
In a Memorandum from the Deputy Commissioner for Services and Enforcement dated March 23, 2009, and in a set of explanatory questions and answers of the IRS dated May 6, 2009, they presented an example of what this means for an offshore account with $1 million dollars in it. Though the penalties under the uniform penalty framework amount to $281,000, the penalties that otherwise might apply amount to more than $2 million (twice the amount deposited in the account in the first place), when you add the 75% civil fraud penalty on unreported tax and additional penalties for failure to file the various information returns.
Now, if you decide to comply with the law, and file the FBAR form as is required, and report your worldwide income as you are required to report, you likely will have no greater audit risk than a similarly situated taxpayer in your income bracket. Filing the forms also provides you with statute of limitations protection, since the statute of limitations typically runs from the date of filing the required forms. So, once again, I urge you to comply with this law and report your account. Not doing so could jeopardize more than your offshore account, it could jeopardize your freedom.