The IRS has extended the time to file a TD F 90-22.1 until June 30 this year. Not sure if you need to file the disclosure form? Be careful how you answer.
The form, known as the Report of Foreign Bank and Financial Accounts or FBAR, is used to report a financial interest in or signature authority for a foreign financial account.
The IRS has increased enforcement of this requirement and that could pose difficulties for some taxpayers. The penalties for failure to file a FBAR are significant, including prison time and large fines.
The Offshore Voluntary Disclosure Program (OVDP) was designed to obtain compliance from taxpayers who have used undisclosed foreign accounts and undisclosed foreign entities to avoid or evade tax into compliance with United States tax laws.
The program was used in 2009 and 2011, and the IRS announced in January that it would reopen the program for 2012. The program will run until the Service announces a closing date.
In 2009 program, the IRS collected $3.4 billion participants, with about 95 percent of the cases closed. From the 2011 program, the IRS has collected an additional $1 billion in payments.
It appears the OVDP has been successful, in part, because of the draconian penalties that accompany failure to comply with FBAR. At the low end, for a non-willful violation, there is a $10,000 penalty.
If the failure to file is found to be willful, the penalty can be $100,000 or 50 percent of the total balance in the account. Additionally, each year you failed to file the disclosure counts as a separate violation.
The program requires individuals to pay a penalty of 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.
However, some taxpayers may be eligible for 5 or 12.5 percent penalties. Participants must file all original and amended tax returns and include payment for back-taxes and interest for up to eight years as well as paying accuracy-related and/or delinquency penalties
Have you reported all of your income?
While not solely determinative, if you have paid taxes on all of your income in all tax years, even if you failed to file the FBAR disclosure, you may avoid the most severe penalties. However, since the FBAR requirement is separate from the requirement to file a tax return, individual circumstance will control.
In announcing the program in January, IRS Commissioner Doug Shulman said, "Our focus on offshore tax evasion continues to produce strong, substantial results for the nation's taxpayers." He also noted, "As we've said all along, people need to come in and get right with us before we find you. We are following more leads and the risk for people who do not come in continues to increase."
If you had not been aware of the filing requirements and you paid all the necessary tax (or did not owe any) you would still be in violation of the filing requirement and subject to penalties. If you file now, you may be able to make an argument that it was an honest mistake and try to minimize your penalties now.
The uncertainty with the program is that the IRS could end it at any time, and as Commissioner Shulman stated, the risk for non-reporting will increase.
So, what if you attempt to merely file the FBAR forms and amend any relevant tax returns, and hope the IRS does not notice the former noncompliance?
The IRS strongly discourages this behavior: they specifically note that, "Those taxpayers making "quiet" disclosures should be aware of the risk of being examined and potentially criminally prosecuted for all applicable years."
This means there is a greater chance that if your accounts are found, you will be speaking with the special agents of the Criminal Investigation Division of the IRS. Failure to file a FBAR carries potential criminal penalties and could be charged as a felony.
There are 11 separate possible violations a taxpayer could be charged with for failing to comply with the OVDP, carrying a wide range of penalties.
Possible criminal charges related to tax returns include tax evasion filing a false return and failure to file an income tax return. Willfully failing to file an FBAR and willfully filing a false FBAR are both violations that are subject to criminal penalties under 31 U.S.C. § 5322.
A person convicted of tax evasion can be subject to a prison term of up to five years and a fine of up to $250,000. Filing a false return carries sentence of up to three years in prison and a fine of up to $250,000.
If you fail to file a tax return, you can receive up to a one-year prison term and a fine of up to $100,000. Failing to file an FBAR subjects a person to a prison term of up to ten years and criminal penalties of up to $500,000.
Given the severe penalties, if you have any questions concerning compliance with these requirements, you should speak with an experienced tax attorney. A mistake in this area could mean substantial fines and your liberty.
Written by the Office of Scott Kauffman