There has been a great deal of discussion over the past six months about the Obama Administration’s crackdown on offshore tax havens used by U.S. citizens to avoid paying income tax.
U.S. Bancorp (UBS), Lichtenstein, Switzerland, Report of Foreign Bank and Financial Account (FBAR) — these are all are words that have recently been connected with offshore tax evasion. It is clear, however, that when our clients see articles or hear news stories, they hear “offshore tax shelters” and “tax evasion” but don’t think those words apply to them.
The problem is, many of them might be wrong.
Any U.S. person who has a financial interest in or signature authority or other authority over any foreign financial account may have to file a Report of Foreign Bank and Financial Account (frequently referred to as an FBAR) if the aggregate value of these accounts exceeds $10,000 at any time during a calendar year.
Examples of situations where someone may have an unexpected FBAR reporting requirement include:
A family member with power of attorney over another family member’s foreign account;
Ownership of an offshore life insurance annuity;
A debit card tied to an account outside of the United States;
Any other offshore holdings that the IRS considers to be a foreign account.
An FBAR can be used by the government to pursue criminal, tax or regulatory investigations and in the conduct of intelligence or counterintelligence activities to protect against international terrorism. This is why the government tells us the FBAR is important.
Notably, however, the FBAR filing requirement also triggers an additional revenue stream into the U.S. Treasury by ensuring that certain foreign financial accounts are subject to U.S. taxation. While not all accounts necessarily result in tax, all accounts falling within the definition of “financial accounts” are subject to disclosure.
Because an account in a foreign country avoids easy detection by the U.S. Government, the tax authorities have a hefty hammer with which to induce compliance with the FBAR reporting requirement. Failing to file an FBAR can result in civil and/or criminal penalties. If the failure to file is willful, a penalty equal to the greater of $100,000 or 50 percent of the account balance can be imposed for each failure to file.
These penalties can, over the course of three years, exceed the entire account balance of the foreign financial account. The point is this — a foreign financial account should cause a client to file an FBAR and to pay any tax associated with that account.
But what if an FBAR has not been filed and tax has not been paid on any income arising from that account?
Fortunately, as part of the Administration’s crackdown on the use of offshore accounts, the government has offered what amounts to an amnesty program under which it will limit any past filing requirements to a six-year period, reduce the multiple 50 percent penalties to a single 20 percent penalty and recommend against criminal prosecution.
The amnesty program was set to expire on Sept. 23, 2009; however, it was recently extended until Oct. 15. The IRS has made it clear that this would be the last extension.
If your client has a foreign financial account that has not been reported to the government on the FBAR form and has not paid any of the tax that is associated therewith, that client should be strongly advised to take advantage of the amnesty program. If tax has been paid, but an FBAR has not been filed, another program is available under which the past-due FBARs can be filed without penalty.
The amnesty program does have certain requirements that must be satisfied for a client to be eligible: they cannot already be under IRS scrutiny and their disclosure of any accounts must be truthful and complete.
But it is clear that persons with foreign financial accounts who do not disclose their existence to the government by Oct. 15 will lose the benefits associated with the amnesty program and potentially face much more severe consequences.
Robert Teuber is a tax attorney with Weiss Berzowski Brady LLP in Milwaukee. He works with individuals and businesses in resolving tax audits, appeals, litigation and collection actions brought by the IRS and Departments of Revenue. Rob can be reached at 414/270-2538 or firstname.lastname@example.org.