FBAR and the 2012 Offshore Voluntary Disclosure Program

Established pursuant to the Bank Secrecy Act (BSA), the “Report of Foreign Bank and Financial Accounts” (FBAR) filing requirements have been in place now since 1972. Despite its long existence, the section in FBAR requiring U.S. persons to file Form TD F 90-22.1 (better known as the “FBAR form”) has only been strictly enforced in the recent years. The FBAR form must be filed by U.S. persons who have a financial interest in or a signature authority over a financial account outside of the U.S., if the aggregate value of the account or accounts exceed $10,000 USD at any time during the calendar year.

A financial account can include a bank account, brokerage account, mutual fund, trust, or other type of foreign financial account and both individuals and entities can have a “financial interest” in an account. A person may have a “financial interest” in an account regardless of whether he holds title to or reaps benefits from the account. This includes persons holding an account indirectly through ownership in a corporation (more than 50% of the shares by value or vote), a partnership (more than 50% interest in the profits), or a trust (present beneficial interest in more than 50 percent of the assets or receiving more than 50 percent of current income).

The FBAR form is not filed with tax returns, but must be filed on or before June 30th of the year following the calendar year being reported. Failing to comply with the FBAR reporting could lead to a minimum penalty of $10,000 USD for each account not reported. A willful failure to file the FBAR could result in civil penalties up to $100,000 USD or 50% of the amount in the account at the time of the violation.

On January 9th, the IRS announced the start of the third “Offshore Voluntary Disclosure Program” (2012 OVDP), which allows taxpayers with undisclosed foreign accounts to come clean about their past non-disclosures in exchange for reduced civil penalties and to avoid criminal liability. To provide better guidance to the 2012 OVDP and in hopes of increasing disclosure under this program, the IRS released an updated Frequently Asked Questions (FAQs) on June 26, 2012

The 2012 OVDP was mainly designed after its predecessor – the 2011 Offshore Voluntary Disclosure Initiative (OVDI) – but includes some differences such as an increase of the maximum “FBAR-related” penalty from 25% to 27.5%. Individuals with offshore accounts or assets of less than $75,000 USD in any calendar year covered by the new initiative will qualify for a 12.5% penalty rate. Some taxpayers will qualify for a 5% rate, but only in narrow circumstances, including in the case of foreign residents who are unaware that they are U.S. citizens. Unlike the earlier voluntary disclosure initiatives, the 2012 OVDP has no deadline to apply, although the terms of the program may be altered or ended entirely at any time.

The latest release of the FAQs reminds participants that the program requires you to file and pay back taxes and interest for the most recent eight tax years for which the due date has already passed. The IRS also noted that it had closed what it called a “loophole” in the current program. Under existing law, a taxpayer who challenges a disclosure of tax information in a foreign court is required to notify the U.S. Department of Justice of the appeal. If a taxpayer fails to disclose this, he or she is ineligible to participate in the disclosure program.

The FAQs also notifies participants that under the new program, the IRS may announce that certain taxpayer groups that have or have had accounts at specific financial institutions will be ineligible due to actions the U.S. government is taking in connection with those institutions. The IRS must provide notice of the prospective date upon which OVDP eligibility will terminate.

Also on June 26, 2012, the IRS announced a proposed new procedure which is intended to assist U.S. citizens living abroad, as well as dual citizens with “low compliance risks” to come into compliance. While it was not clear what the IRS finds to be “low compliance risk,” the IRS’s News Release stated that tax returns showing less than $1,500 in tax due would be treated as low risk. More detailed procedures laying out the qualifications are scheduled to be released by September 1, 2012. Taxpayers meeting the criteria under the new program would be required to file delinquent tax returns for the past three years, as well as past due FBARs for the past six years and pay any related federal tax and interest due.

There are also new streamlined procedures for taxpayers who have foreign retirement plans (such as the Canadian Registered Retirement Savings Plans) to resolve certain issues. In some circumstances, under tax treaties these plans qualify for income deferral if a timely election is made. These “streamlined procedures” are meant to help those taxpayers who have failed to make such a timely election.

Thus far, the disclosure programs appear to be working. More than 33,000 taxpayers have come forward under the first two disclosure programs in 2009 and 2011, with the government collecting more than $5 Billion USD in back income tax, interest and penalties

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und viele Grüße aus Charlotte
Reinhard von Hennigs