by Andrew Muir, Emily Kingston and Steven Katz
The United States Department of Justice describes combatting non-compliance with U.S. tax laws through the use of offshore accounts as one of the Tax Division’s “top litigation priorities.” Over the past several years, the Department and the IRS have stepped up investigatory efforts into U.S. citizens’ use of undeclared foreign bank accounts and, most recently, have obtained assistance from Congress and the foreign banks themselves. With the date for banks to provide account holder information to the IRS fast approaching, time may be running out for taxpayers to voluntarily disclose their offshore accounts under the IRS’s Offshore Voluntary Disclosure Program (“OVDP”) and avoid prosecution or substantial penalties.
By way of background, taxpayers are required to report their interest in or signature authority over a foreign bank account on Schedule B of their U.S. individual income tax return, which asks the question: “At any time during [relevant year], did you have an interest in or a signature or other authority over a financial account in a foreign country, such as a bank account, securities account, or other financial account?” If the “yes” box is checked, the taxpayer is directed to file Form TDF 90-22.1, otherwise known as the “FBAR” (Report of Foreign Bank and Financial Accounts), if the aggregate value of the accounts exceeds $10,000 at any time during the year. The FBAR is due by June 30 of each year.
In 2010, Congress enacted the Foreign Account Tax Compliance Act (“FATCA”), which added section 1471 to the Internal Revenue Code as another mechanism to target non-compliance with U.S. tax laws by U.S. taxpayers who use foreign financial accounts. This section incentivizes foreign financial institutions to provide account information about U.S. citizens’ foreign accounts. Institutions that provide account information, including account holders’ names, addresses, taxpayer ID numbers, account numbers, account balances, and even gross receipts and gross withdrawals or payments from the account will avoid a 30% withholding requirement on payments to a foreign financial institution. By June 30, 2014, many non-U.S. banks will begin disclosing financial accounts and account holders’ information to the IRS.
In addition to FATCA taking effect, the DOJ has vigorously pursued investigation into U.S. account holders’ undisclosed accounts held by Swiss banks. The investigations have resulted in over 100 Swiss financial institutions expressing their intent to participate in a program under which they would provide account information about U.S. account holders and their foreign accounts in exchange for non-prosecution agreements. These agreements will require that the participating Swiss banks begin disclosure in the very near future.
Once these foreign financial institutions disclose account information to the IRS and DOJ, it will likely be too late for taxpayers to enter the OVDP. Under the program, taxpayers may voluntarily disclose their foreign accounts and pay taxes and penalties, but otherwise avoid criminal charges for failing to file an FBAR, report income and pay the required taxes. The OVDP requires, however, that a taxpayer not be under civil or criminal investigation, the odds of which will increase substantially with the upcoming FATCA disclosures and other cooperation by foreign banks.
We encourage you to contact the tax attorneys at Sideman & Bancroft at (415) 392-1960 to assist with foreign account compliance, the OVDP, IRS audits and criminal investigations and prosecutions.
This publication is for informational purposes only and is not intended to provide legal or tax advice, or to create an attorney-client relationship.
Pursuant to IRS Circular 230, unless expressly stated to the contrary, any tax advice is not intended and cannot be used to (i) avoid penalties under the Internal Revenue Code or (ii) promote, market or recommend any transaction or matter to another party.
