A lot has been said in the news recently about the Internal Revenue Service working with foreign countries (particularly Switzerland) on the disclosure of information concerning U.S. persons owning foreign financial accounts. However, when most people hear these stories, they assume that the government is only interested in those people (or businesses) who have opened foreign accounts in an effort to evade U.S. income taxes.
The fact is, however, that any person or business that has a “foreign financial account” must disclose its existence to the IRS on a Form 90-22.1, commonly known as an FBAR. The FBAR form is due on June 30 of any calendar year and must disclose any foreign accounts if the aggregate balance of all foreign accounts equals $10,000 or more. Even if the person who owns the account reported and paid tax on the income from that account, they must still file the FBAR form.
Failing to file this form can have severe consequences. The failure can result in a $10,000 penalty for each failure to file. Where that failure is considered to be willful, penalties can rise to an amount equal to 50% of the account balances. Therefore, if someone willfully fails to file the form for three years in a row, the penalties can equal an aggregate of 150% of the account balances. Criminal penalties are also possible.
Recognizing that many people may have been unaware of the requirement to report foreign financial accounts, or may not have realized that their holdings constitute foreign financial accounts, the IRS is allowing these U.S. persons to participate in its Voluntary Disclosure Program (essentially an amnesty program). The program allows taxpayers to disclosure the foreign accounts, pay any tax related to those accounts and reduce the amount of penalties that will be imposed.
Unfortunately, however, this Voluntary Disclosure Program (i.e. amnesty) is only available with the reduced penalty structure for a limited amount of time. On September 21, 2009, the IRS extended the deadline for participating in the Program until October 15, 2009. By having done so, the IRS hopes to increase the number of taxpayers that come forward through the Voluntary Disclosure Program.
This was certainly good news for taxpayers who were attempting to comply with the Program but were scrambling to get the materials necessary together before the amnesty expires. Perhaps the extended deadline also gives additional taxpayers time to realize that their foreign holdings may constitute foreign accounts that are reportable on the FBAR form. For information on this Voluntary Disclosure Program, you can visit the IRS website by clicking here or return to this blog for future posts discussing the various aspects of the FBAR Voluntary Disclosure Amnesty Program.