Browse » Home » Tax » Foreign Bank Account Reporting – 2011 Offshore Voluntary Disclosure Initiative

Foreign Bank Account Reporting – 2011 Offshore Voluntary Disclosure Initiative

Does the date June 30, 2011, mean anything to you?

It should – especially if you’re a “U.S. person” (US citizen, Green Card holder and/or a non-resident alien if you are physically present in the US over a prescribed number of days and hold foreign assets with an aggregate value of $10,000 or more.

June 30th is the deadline for filing  “Form TD F 90-22.1″ for 2010;  this  “foreign bank account report” (FBAR) gives the Treasury a look at your  foreign “bank, brokerage, or ‘other’ financial accounts” you held during 2010 .  If you have a financial interest in, or signature or other authority over foreign bank, securities or “other” financial accounts with an aggregate value exceeding $10,000, you must file the FBAR. That’s true even if the account contains only precious metals or other non-cash assets, or generates no income.

The FBAR is not the only reporting obligation for your offshore investments.  Additionally, you must also report your foreign accounts each year on Schedule B of your Form 1040, federal income tax return. Moreover, the IRS has created a special reporting regime for Americans with more than $50,000 in non-U.S. assets.

FUBAR – ‘Fouled Up Beyond All Recognition’

The FBAR offshore reporting regime truly is FUBAR. The tax penalties for failing to file FBAR forms are draconian. You could end up paying a $10,000 fine per unreported account for each year you neglect to file the FBAR. Far worse, if you “willfully” fail to file the form, you face a fine up to $500,000, five years imprisonment . . . or both.  In addition, if you own more than 50% of the shares of a corporation (by value, U.S. or foreign) with a foreign account, the corporation must file a FBAR. You must also file a separate FBAR in your own name acknowledging the same account.  Similar rules apply to partnerships. Even a single-member LLC, taxed as a “disregarded entity,” is a “U.S. person” for FBAR purposes.

Offshore Voluntary Disclosure Initiative

If for whatever reason you failed to satisfy the FBAR requirements anytime during the past eight years – now is your chance!  A  new IRS initiative allows certain taxpayers to voluntarily disclose hidden offshore accounts (accounts outside of the US) without the risk of criminal prosecution and also provides for reduced civil penalties for prior noncompliance with offshore account reporting requirements. The initiative, known as the 2011 Offshore Voluntary Disclosure Initiative (OVDI), was announced by the IRS on February 8, 2011. Taxpayers participating in the 2011 OVDI must file all original and amended tax returns and include payment for taxes, interest and accuracy-related penalties by August 31, 2011.

Penalty Framework

The 2011 OVDI provides the following penalty framework during the eight-year look-back period:

• an “off-shore” penalty of 25% on the highest annual aggregate balance in the unreported accounts;
• an “accuracy-related” penalty of 20% for unpaid taxes; and
• late filing and/or late payment penalties in certain cases.

A taxpayer with offshore accounts or assets that, in the aggregate, did not exceed $75,000 in any calendar year during the look-back period will qualify for a reduced 12.5% rate instead of the standard 25% rate. A 5% rate (instead of the standard 25% rate) will apply in certain limited circumstances (e.g., in the case of foreign residents who were unaware that they were U.S. citizens).

Under the 2011 OVDI, taxpayers will not be required to pay a penalty greater than what they would otherwise be liable for under the maximum penalties imposed under existing statutes. The 2011 OVDI also offers a modified mark-to-market election for taxpayers with interests in passive foreign investment companies (e.g., foreign mutual funds) to determine the income from such investments.

Eligibility

Taxpayers, including entities such as corporations, trusts and partnerships, who have undisclosed offshore accounts or assets are eligible to apply for the 2011 OVDI. However, taxpayers under criminal or civil investigation by the IRS or who participated in the 2009 Offshore Voluntary Disclosure Program (predecessor to the 2011 OVDI) are ineligible.

Procedure

There is a fairly simple process to make a voluntary disclosure under the 2011 OVDI. A taxpayer may either submit basic personal information by fax letter to the IRS or submit a more detailed disclosure letter from the outset. Either way, a detailed package of information must ultimately be provided to the IRS to secure acceptance into the program. Mark Bailey & Co. has taken several clients through this process and can assist you.

Webpage

The IRS has launched a new webpage that includes the full terms and conditions of the 2011 OVDI, as well as the necessary forms and documents for making a disclosure.  Additionally, the webpage contains information regarding the procedure for making a voluntary disclosure and a comprehensive FAQ. For more information regarding the 2011 OVDI, click here .