Lugar de Noticias Haynes and Boone

The Crackdown on Foreign Account Holders Continues: The 2011 Voluntary Disclosure Initiative and the Updated Filing Requirements for Foreign Financial Accounts
06/28/2011
Kenneth K. Bezozo, Vicki L. Martin-Odette, Richard M. Fijolek, Jeff S. Dinerstein

With budgetary pressures increasing and deficits mounting, the United States Internal Revenue Service (“IRS”) is continuing its campaign to find U.S. citizens and residents who have failed to report both (1) their worldwide income on their U.S. federal tax returns and (2) all non-U.S. financial accounts in which they have a financial interest or over which they have signature authority.  The IRS has stepped up its two-pronged effort to get U.S. citizens and residents to comply with U.S. tax laws.  First, for taxpayers who have unreported income from non-U.S. financial accounts, the IRS is offering a new voluntary disclosure program that permits taxpayers to avoid severe civil penalties and possible criminal charges if they voluntarily disclose their unreported income from non-U.S. accounts and pay back taxes, interest and specified penalties—all before August 31, 2011.  Second, for persons and entities that have signature authority over or a financial interest in foreign financial accounts (even if such persons or entities are not the beneficial owners of such accounts), the IRS has clarified the law requiring that U.S. citizens and residents must report all of these foreign financial accounts.  This report is commonly known as the “FBAR.”

 

Voluntary Disclosure Initiative of Non-U.S. Accounts

In February 2011, the IRS announced a second round of the Offshore Voluntary Disclosure Initiative, which is a voluntary disclosure program for U.S. citizens and residents who have failed to report income from non-U.S. checking accounts, savings accounts, mutual funds and other financial accounts (i.e., all financial accounts held outside the United States).  [CAUTION:  If a person’s non-U.S. income has already been reported or the relevant foreign accounts have generated no income or gains, the voluntary disclosure program is not appropriate].  The voluntary disclosure initiative allows taxpayers to become compliant with U.S. tax law, avoid substantial civil penalties and eliminate the risk of criminal prosecution. 

 

But voluntary disclosure comes at a price.  Participants with unreported income from non-U.S. financial accounts for the tax years 2003 through 2010 must file amended tax returns for such years, pay all back taxes plus interest, and pay a 25 percent penalty on the highest value of the unreported account(s) during the years in which the income went unreported.  However, some individuals with low account balances in their financial accounts may be eligible for a lower penalty.  You should check with your tax advisor to determine if you qualify for the reduced penalty.

 

The IRS previously implemented a similar initiative in 2009, which imposed a slightly lower percentage penalty.  Approximately 15,000 people participated in the 2009 initiative.  For taxpayers choosing to participate in the new voluntary disclosure initiative, amended returns must be filed for years 2003 through 2010, and all such amended returns and required tax, interest and penalty payments must be submitted by August 31, 2011.  Participants in the voluntary disclosure initiative also must file all unfiled FBARs (as described below).

 

The FBAR

Apart from the voluntary disclosure initiative described above, U.S. citizens and residents are required to disclose information to the U.S. Treasury Department relating to non-U.S. financial accounts in which they have a financial interest or over which they have the ability to dispose of assets in the account, including any type of signature authority.  This information is disclosed by filing Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts—commonly known as the FBAR.  The FBAR requires, among other things, disclosure of the maximum value of the accounts during the calendar year reported, the account numbers or designations, and the name and address of the financial institutions in which the accounts are held.  The FBAR must be filed in each year that a person meets the FBAR requirements.

 

Three groups of people must file FBARs: (i) participants in the voluntary disclosure initiative; (ii) U.S. citizens and residents with a financial interest in a foreign account; and (iii) U.S. citizens and residents with signature authority over foreign accounts (even if they have no foreign income, have no financial interest in the foreign account and do not participate in the voluntary disclosure program).  As an example, assume a U.S. citizen works for a U.S. holding company in New York.  The holding company has a foreign subsidiary and the subsidiary has a bank account in the U.K.  If the U.S. citizen has signature authority over the subsidiary’s U.K. bank account, then such person must file an FBAR.  Another example involves a U.S. resident who owns more than 50 percent of the stock of a non-public corporation that has a brokerage account in Hong Kong.  The U.S. resident/shareholder is deemed to have a financial interest in the corporation’s Hong Kong brokerage account and therefore such person must file an FBAR.

 

Generally, the FBAR is due on or before June 30 of the year immediately following the calendar year being reported.  The deadline for filing a 2010 FBAR is June 30, 2011.  Unlike a U.S. federal income tax return, which is a separate and distinct filing from the FBAR, there is no extension of time available for filing an FBAR.  Recently, however, the filing deadline was extended until  June 30, 2012 for certain FBARs pertaining to calendar years 2010 and earlier years filed by employees and officers of specified entities, such as investment advisors, who have signature authority but no financial interest in a non-U.S. financial account.  Similarly, some individuals with signature authority but no financial interest in a non-U.S. financial account may be permitted to delay filing FBARs for calendar years 2009 and earlier until November 1, 2011, if they were previously granted proper extensions. 

 

The penalties for failing to file an FBAR are significant.  Failure to file is punishable by penalties up to $10,000 per failure.  However, if the failure is willful, the civil penalty is the greater of $100,000 or 50 percent of the value of the foreign account, and criminal penalties may apply as well.

 

If you have any questions, please contact one of the attorneys listed below. You may also view the alert in the PDF linked below.

 

Kenneth K. Bezozo
212.659.4999

 

Vicki Martin-Odette
214.651.5674

 

Richard S. Fijolek
214.651.5570

 

 

 Jeffrey S. Dinerstein
713.547.2065

 

 

 

Circular 230 Notice:  In order to comply with certain U.S. Treasury regulations, unless expressly stated otherwise, any U.S. federal tax advice that may be contained in this written or electronic communication, including any attachments, is not intended or written to be used, and cannot be used, by any person for the purpose of (i) avoiding any tax penalties that may be imposed by the Internal Revenue Service or any other U.S. federal taxing authority or agency or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.

PDF - Crackdown_on_Foreign_Account_Holders