Media Type: Alert
On January 9, 2012, the Internal Revenue Service (IRS) announced that it is extending the 2011 offshore voluntary disclosure initiative (OVDI). The terms of the program are substantially similar to the 2011 OVDI but the top tier penalties increased from 25% to 27.5% of the highest account balance. While the extension of the OVDI is indefinite, the IRS cautioned that it could be discontinued at any time.
Each U.S. citizen or resident who owns or has signing authority over one or more foreign bank accounts with an aggregate balance over $10,000 is generally required to file a Foreign Bank Account Report (FBAR) by June 30 of each year. The repercussions for failing to file an FBAR are significant. In addition to any back taxes, penalties and interest on any unreported income, criminal exposure can range from up to $500,000 in fines to 10 years in prison. Civil penalties can reach the greater of $100,000 or 50% of the balance of the foreign account.
The extension of the OVDI represents the third attempt by the IRS to encourage taxpayers who are delinquent in their FBAR filings to come forward voluntarily in exchange for reduced penalties and (in most cases) without the threat of criminal prosecution. In order to participate in the OVDI, taxpayers must complete the following steps [UPDATED JULY 2012]:
A further trap for the unwary is a new separate filing requirement for the 2011 tax year. Married taxpayers living in the U.S. and filing a joint return must file Form 8938 with their 2011 income tax returns if their “specified foreign assets” exceed $100,000 on the last day of the tax year or more than $150,000 at any time during the tax year ($50,000/$75,000 for single filers). Specified foreign assets include not only any financial account maintained by a foreign financial institution but also other assets held for investment including stock or securities that are issued by someone other than a U.S. person. Taxpayers who fail to file Form 8938 face a penalty of $10,000 (increasing to $50,000 if not paid within 90 days). While there is significant overlap between the FBAR and Form 8938, taxpayers must be aware that they are separate obligations.
JULY 2012 UPDATE:
The IRS has recently issued guidance on the extension of the OVDI program, which provides additional information about the current OVDI program. A key facet of this new guidance is the clarification on how certain foreign retirement accounts and pension plans will be treated within the program.
Specifically, the IRS has stated that if a taxpayer has a Canadian registered retirement savings plan (RRSP), registered retirement income fund (RRIF) or other similar Canadian plan, the OVDI program will now permit a late election pursuant to the U.S.-Canada income tax treaty. This allows the taxpayer to defer U.S. income tax on the income earned by the RRSP or RRIF, so long as the income has not been distributed. The allowance of the late election works to exclude the value of these retirement and pension plans from the OVDI penalty base.
Further, the recent guidance intimates that this relief may not be limited to Canadian retirement and pension plans. The IRS has stated that it will entertain inquiries as to whether certain foreign retirement and pension plans from other countries should be excluded from the OVDI penalty base.
If you have questions about these or other tax law issues, please call 301-340-2020.
Tax Law at Stein Sperling
Stein Sperling’s tax law attorneys counsel clients on the intricacies of business and personal taxes in order to minimize tax liabilities. Each of our tax law attorneys holds either a Master of Laws degree in Taxation or is a Certified Public Accountant (CPA) or both. We participate in programs that allow us to stay on top of the rapidly changing world of tax laws, regulations, cases and rulings. We decode the tax talk and carefully guide our clients, helping them understand the big picture tax implications and tailoring strategies that benefit their short- and long-term objectives.
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