If you have failed to report your foreign bank accounts, the IRS has initiated a second amnesty period for 2011 in which you can report these accounts, pay a fine and avoid criminal prosecution.
The author of this article, David McKeegan, is Director and Founder of Greenback Expat Tax Services, a US Income Tax provider that specializes in tax preparation for Americans who live abroad. All information was correct at the time this article was written (February 2011).
Over the last several years, the IRS has been getting more and more aggressive in their efforts to ensure compliance amongst Americans living abroad. Although there has been no doubt about how seriously the US government takes this mission, since the end of the 2009 amnisty the IRS has been a bit unclear as to the implications and penalties for failing to do so.
On Feb 8th 2011, the IRS announced an initiative that will be welcomed by many Americans living abroad who have failed to file taxes or report their foreign bank accounts (many times, inadvertently). This initiative will give those who are out of compliance an opportunity to voluntarily disclose their foreign bank accounts, pay the penalty upfront and avoid criminal prosecution. This article will tell you a bit more about your requirements as an American expat, the 2011 Offshore Voluntary Disclosure Initiative (OVDI) terms, and answer a few common questions about this program.
Before getting into the terms of the IRS Voluntary Disclosure Program, what are the foreign bank account reporting requirements (FBAR)?
Essentially, if you have over $10,000 or the foreign equivalent in overseas bank accounts you must report this money to the Treasury by June 30th each and every year. This is cumulative across all of your foreign-owned or controlled accounts for personal or business purposes. For example: if you have $2,000 in 5 accounts you need to report all 5 accounts. You need to report these bank accounts regardless of whether you held over $10,000 for the whole year or just one day.
This is of course in addition to your requirement to file a US income tax return. All US Citizens and Green Card holders are required to file a US Federal Income Tax return each year if their income is over the minimum threshold. It doesn't matter where you earn your income or whether you have filed in your country of residence as well; you are required to file in the US if your income is above these levels. The thresholds are currently:
- Single with income over $9,350
- Married filing jointly with income over $18,700
- Married filing separately with income over $3,650
What is the 2011 Offshore Voluntary Disclosure Initiative (OVDI)?
The 2011 Voluntary Disclosure Program gives Americans who hold foreign bank accounts that had been previously unreported an opportunity to come clean, pay a reduced penalty and avoid criminal prosecution. This offers a significant incentive for individuals who live and work abroad to come forward and declare any bank accounts they have not already told the IRS about and to get caught up on their US tax returns.
Under the 2011 Offshore Voluntary Disclosure Initiative (OVDI) initiative, the penalty framework for individuals is as follows:
- 25% penalty on the amount in the foreign accounts.
- The penalty is based on the highest aggregate account balance between 2003– 2010.
- You must file back tax returns or amendments and pay back-taxes and interest for up to 8 years as well as any penalties that maybe due.
- Everything is due by August 31st 2011 i.e. all original and amended tax returns. All penalties and taxes due must be paid as well as any interest and accrued penalties.
If you are living abroad and the total of your aggregate accounts did not exceed $75,000 during this time period, then you may qualify for a lower penalty threshold of 12.5%.
You may also qualify for a reduced penalty of 5% if you meet certain requirements:
- If you meet all of the following:
- If you did not open or cause the account to be opened
- Have exercised minimal, infrequent contact with the account
- Have not withdrawn more than $1,000 from the account in any year between 2003-2010 (unless to close the account)
- Can show that all US taxes have been paid on the funds deposited into the account
- If you are a foreign resident and were unaware you were a US citizen.
How does this differ from the 2009 Special Voluntary Disclosure Program?
The 2009 Special Voluntary Disclosure Program, which ended October 15th 2009, had a lower penalty rate. In the 2009 program, taxpayers faced up to a 20% penalty over a six-year period. The 2011 program includes a number of new provisions as well. Approximately 15,000 taxpayers with bank accounts in more than 60 countries came forward as a result of the 2009 program. One thing is clear: the IRS is not going to reward people for waiting, so it is likely that the penalties will only get more severe over time for non-compliance.
What about for those people who came forward between the closing date of the 2009 Program and now?
Since the 2009 Special Voluntary Disclosure program ended, an additional 3,000 individuals have come forward, but, until now, many of these people have been in a state of limbo as the IRS had not clearly defined what penalties those individuals may face. These individuals will be eligible for the terms of the 2011 program.
What If I Have Been Fully Compliant with all my US Expat Tax Returns but not the FBAR?
If you have been filing your US tax returns, but have not filed the Foreign Bank Account Form (FBAR- Form TD F 90-22.1.) then you may not need to worry about the voluntary disclosure. The purpose of the voluntary disclosure is to provide a way for individuals who have not been reporting their taxable income to disclose this income and avoid criminal prosecution. So, if you have not been reporting your foreign bank accounts via the FBAR form, but have paid tax on any income from these accounts then you should file the delinquent FBAR forms along with a statement saying why the reports are late, but in all likelihood you do not need to partake in the voluntary disclosure program.
The IRS has said they will not impose penalties for failure to file the FBAR form if there is no tax liability and you catch up with the forms by August 31st. Please note your 2010 FBAR form is due on June 30th 2011 not August 31st.
In summary, it looks like the implications of failing to file taxes or report foreign bank accounts will only get more punitive. According to IRS Commissioner Doug Shulman "As we continue to amass more information and pursue more people internationally, the risk to individuals hiding assets offshore is increasing. This new effort gives those hiding money in foreign accounts a tough, fair way to resolve their tax problems once and for all. And it gives people a chance to come in before we find them."
For more information about this program and other tax matters, please consult www.greenbacktaxservices.com or www.IRS.gov.
If you are interested in participating in this program, we recommend you consult your tax preparer immediately.