Foreign bank accounts are much more common in today’s world. Such accounts may be legally opened and used by persons at all income levels who live, work, conduct business, own real estate, study or play abroad (not just alleged “tax cheats”) – especially in a culturally diverse area like Milwaukee, Ozaukee and Waukesha counties. Nevertheless, a new reporting requirement that takes effect this tax season and a number of recent local, high-profile criminal prosecutions serve as timely reminders of the high priority that the Internal Revenue Service (IRS) has placed on the timely and proper reporting of foreign bank accounts and assets.
For more than 30 years, the law has required a U.S. person (individuals, corporations and partnerships) who has a financial interest in, signature or other authority over a bank, securities or other financial account located in a foreign country to report that relationship to the IRS if the aggregate value of those accounts exceeded $10,000 at any time during the year. The report is made by filing a Form TD F 90-22.1 Report of Foreign Bank and Financial Account (FBAR) with the IRS by June 30.
Penalties for not filing the FBAR in a timely manner may be particularly severe (some of the worst in U.S. tax law), including criminal prosecution, imprisonment of up to 10 years, and/or civil penalties of as much as 50 percent of the value of an unreported foreign bank account per year. The criminal and civil penalties may apply even if the income from the foreign account was properly reported. Businesses and individuals who have unreported foreign accounts or assets should consult with professional counsel in order to discuss compliance options and minimize their exposure to penalties.
Despite the 30-year law, aggressive enforcement of the FBAR filing requirement is a relatively new phenomenon, and the IRS is now in the midst of a third “offshore voluntary disclosure” program (announced in January) that runs indefinitely. Like its predecessor disclosure programs, this program offers taxpayers the opportunity to avoid criminal prosecution and the most serious civil penalties by filing delinquent FBARs and paying a civil penalty.
The enforcement pressure will only increase with the advent of the Foreign Account Tax Compliance Act of 2010, which requires taxpayers to disclose certain foreign accounts and assets each year on their individual income tax returns beginning with the 2011 tax year, and requires foreign financial institutions to enter into agreements with the IRS to disclose the names of U.S. persons who hold accounts. The information received from foreign financial institutions will be compared with FBARs and information reported on individual income tax returns.
Doug Pessefall is a shareholder at Whyte Hirschboeck Dudek, where he heads the firm’s tax exempt organizations team.
