Buchanan Law Group
July 29, 2009
The e-mail subject line for this Law Note may seem a bit dramatic, but not as dramatic
as the criminal and civil penalties with which taxpayers may be hit if they do not
report holdings in certain offshore accounts. I am sending this law note to remind
you of a fast-approaching deadline (September 23rd) by which taxpayers must act,
to avoid certain penalties or prosecution for past noncompliance in this area.
United States citizens, residents and certain other persons must annually report
their direct or indirect financial interest in (or authority over) a financial
account that is maintained with a financial institution located in a foreign country
if, for any calendar year, the aggregate value of all foreign accounts exceeded
$10,000 at any time during the year. Such interests are generally reported by June
30 of each year on a Form TD F 90-22.1 (Report of Foreign Bank and Financial Accounts,
commonly known as an "FBAR"). In memoranda issued May 23, 2009 by the IRS, the IRS
is offering an opportunity for taxpayers in noncompliance to come back into the
fold, in a way that can avoid criminal prosecution and civil penalties. The catch
to receiving amnesty? Taxpayers must make the IRS aware of their noncompliance
prior to the IRS contacting them, in accordance with the procedures set forth in
the IRS's Internal Revenue Manual (at I.R.M. 220.127.116.11). If you are out of compliance
and missed the June 30 deadline, don't worry - the May 23, 2009 memoranda extend
the deadline to September 23, 2009.
If taxpayers take advantage of the voluntary disclosure program, they may limit
their exposure to the following:
· Payment of the past due taxes, plus interest.
· Payment of an accuracy-related penalty or delinquency penalty on all years, equal
to 20% of the aggregate total of all taxes and interest.
· In lieu of other penalties that may apply, including FBAR and information return
penalties, payment of a penalty equal to 20% of the amount in the foreign bank accounts/entities
in the year with the highest balance/value.
If taxpayers DO NOT take advantage of the amnesty/voluntary disclosure program and
the IRS discovers the noncompliance, what can happen? A taxpayer in this situation
can be subject to the following criminal and civil prosecution and/or penalties:
· Prosecution for tax evasion (26 U.S.C. §7201). If convicted, a person is subject
to a prison term of up to five years and a fine of up to $250,000.
· Prosecution for filing a false return (26 U.S.C. §7206(1). If convicted, a person
is subject to a prison term of up to three years and a fine of up to $250,000.
· Prosecution for failure to file an income tax return (26 U.S.C. § 7203). A person
who fails to file a tax return is subject to a prison term of up to one year and
a fine of up to $100,000.
· The failure to file an FBAR (see discussion below) and the filing of a false FBAR
are both violations that are subject to criminal penalties under 31 U.S.C. § 5322,
carrying a prison term of up to ten years and criminal penalties of up to $500,000.
In addition to the potential for criminal prosecution, the following civil penalties
also potentially apply (this list is not exhaustive):
· A penalty for failing to file the FBAR. Generally, the civil penalty for willfully
failing to file an FBAR can be as high as the greater of $100,000 or 50% of the
total balance of the foreign account. See 31 U.S.C. §5321(a)(5). Nonwillful violations
are subject to a civil penalty of not more than $10,000.
· A penalty for failing to file Form 3520 (transactions with foreign trusts or receipt
of foreign gifts) - up to 25% to 35% of gross reportable amount.
· A penalty for failing to file Form 3520-A (U.S. owned foreign trust) - 5% of trust
· A penalty for failing to file Form 5471 (U.S. person involved with a foreign corporation)
- $10,000 for failing to file each one of several applicable information returns,
for each month the failure continues (up to a maximum of $50,000 per return).
· A penalty for failing to file Form 5472 (certain U.S. owned foreign corporations)
- $10,000 for failing to file each of several applicable information returns, with
an additional $10,000 added for each month the failure continues (up to a maximum
of $50,000 per return).
· A penalty for failing to file Form 926 (U.S. transfer of property to a foreign
corporation) - 10% of the value of the property transferred (up to a possible maximum
of $100,000 per return).
· A penalty for failing to file Form 8865 (U.S. interest in certain foreign partnerships)
- $10,000 for failure to file each of several applicable returns relating to certain
activities, with an additional $10,000 added for each month the failure continues
(up to a maximum of $50,000 per return), and 10% of the value of any transferred
property (subject to a $100,000 limit).
· Fraud penalties of up to 75% of the unpaid tax.
· A penalty for failing to file a tax return - up to 25% of the balance due.
· An accuracy-related penalty - up to 20% to 40% of the underpayment.
Excluding criminal prosecution, the difference between using the voluntary disclosure
program and remaining silent can be significant for taxpayers who are caught. In
an IRS example of a taxpayer with an unreported $1,000,000 balance offshore in
year 1, with unreported interest in each of six years of $50,000 per year. The
taxpayer who comes forward would pay $386,000 plus interest. The taxpayer who is
discovered without coming forward could face up to $2,306,000 in tax, accuracy-related
penalty, and FBAR penalty. The taxpayer would also be liable for interest and possibly
additional penalties, and an examination could lead to criminal prosecution.
What to Do?
If you or a client has unreported income in an offshore account, it would be wise
to consider participating in the program. You can do so by sending a letter to the
nearest Special Agent in Charge, IRS Criminal Investigation, stating that you wish
to make a voluntary disclosure. For more information, you may call IRS Criminal
Investigation in San Francisco at (415) 522-6001 or in Oakland at (510) 637-1031.
Thank you for taking the time to read this Law Note. We hope you find the information
helpful. More information can be found on the IRS 's website, at http://www.irs.gov/newsroom/article/0,,id=206012,00.html.
If you have any questions, please do not hesitate to contact us.
Buchanan Law Group
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