Earlier this year, the IRS announced that it wants to “help people hiding offshore accounts get current with their taxes” and opened its third offshore voluntary disclosure program. Previously, many delinquent U.S. taxpayers, including dual citizens, elected to come into U.S. tax compliance, albeit at substantial cost. The voluntary disclosure programs conducted by the IRS in 2009 and again in 2011 yielded more than $4.4 BILLION from U.S. taxpayers.

This Tax Alert reminds U.S. taxpayers that the IRS and the Justice Department continue to aggressively pursue civil penalties and criminal prosecution in connection with international tax evasion and are employing their considerable resources to get the job done.

With respect to foreign financial disclosure obligations, there are three matters that U.S. taxpayers and dual citizens will want to consider for this current tax filing season:

(1) 2011 FBAR Requirements: Form TD F 90-22.1 due on June 30, 2012 (2) NEW FACTA Requirements: Form 8938 due WITH the 2011 Federal Income Tax Return (3) The latest IRS Offshore Voluntary Disclosure Program

(1) FOREIGN ACCOUNT REPORTING: FBAR FORM TD F 90-22.1

By now, many U.S. taxpayers have learned about their FBAR obligations.¹  The “Report of Foreign Bank and Financial Accounts” – commonly known as “FBAR” – must be filed with the U.S. Treasury Department by all U.S. persons, including dual citizens, having a financial interest in, or signature or other authority over, a bank, securities or other financial account in a foreign country if the aggregate value exceeds $10,000 at any time during the calendar year. The FBAR requirements currently apply to both U.S. individuals and entities. Civil penalties for failure to file required FBARs can be harsh and often are disproportionate to the foreign account balances.

United States persons and dual citizens subject to the FBAR requirements for 2011 must prepare Form TD F 90-22.1 and such form must be RECEIVED by the U.S. Treasury by June 30, 2012. No extension is permitted. The FBAR Form is not submitted with the U.S. federal income tax return, but rather is sent to the U.S. Department of Treasury in Detroit, Michigan. Those individuals who are not in compliance with FBAR for years before 2011, and who owe U.S. income taxes as a result, may wish to consider the 2012 Offshore Voluntary Disclosure Program, described below.

(2) NEW REPORTING UNDER FATCA: IRS FORM 8938

The Foreign Account Tax Compliance Act (“FATCA”), enacted as part of the Hiring Incentives to Restore Employment Act of 2010, requires individual U.S. taxpayers holding “specified foreign financial assets” to attach a Form 8938 to their federal income tax returns. Form 8938, Statement of Specified Foreign Financial Assets, is required for tax years that begin after March 18, 2010 and thus will impact the 2011 U.S. federal income tax returns for most individuals affected by FATCA.

“Specified foreign financial assets” may include foreign financial accounts, foreign stocks / securities and foreign financial instruments. The reporting thresholds vary but individual taxpayers having more than $50,000 in specified foreign financial assets should consult with their tax advisors. Failure to file Form 8938 can result in very substantial penalties.

At present, Form 8938 is only required of certain individual taxpayers. It is anticipated that certain domestic entities will be required to file Form 8938 in future tax years.

(3) 2012 OFFSHORE VOLUNTARY DISCLOSURE PROGRAM

The IRS has seen 33,000 voluntary disclosures as a result of the 2009 and 2011 initiatives. Under the 2012 program, individuals may be required to pay a penalty of up to 27.5 percent of the highest aggregate balance in foreign bank accounts/entities or value of foreign assets during the eight full tax years prior to the disclosure. In limited situations, taxpayers can qualify for a reduced penalty of 5 percent or 12.5 percent.

U.S. taxpayers, including dual citizens, with foreign financial assets will want to consider FBAR and FATCA for this current tax filing season. Individuals who wish to come into compliance for unreported offshore income will want to consider the 2012 offshore voluntary disclosure program; at present the program is open for an indefinite period but the IRS has reserved the right to announce its closure at any time.

Footnotes

  1. See "Tax Update: Recent Changes to Foreign Bank Account Reporting Rules," Brown Rudnick Alert, June 2011; "FBAR: IRS Provides Limited Relief for Foreign Hedge Funds & Private Equity Funds,” Brown Rudnick Alert, March 2010; “Foreign Individuals with a Physical Presence in the U.S. May Have FBAR Obligation,” Brown Rudnick Alert, August 2009; “FBAR – Report of Foreign Bank and Financial Accounts: IRS Extends 2008 Filing Deadline to June 2010,” Brown Rudnick Alert, August 2009; “IRS Enforces Report of Foreign Bank Accounts (FBAR) Rules,” Brown Rudnick Alert, June 2009.