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Disclosures of Foreign Bank Accounts

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At the recent Offshore Voluntary Compliance Update panel at the American Bar Association Section of Taxation meeting in Washington, everybody was anticipating an answer to one question: “Will the IRS grant the same treatment to people who choose not to participate in Voluntary Disclosure Program (VDP) for FBARs as to people who do?”

The attendees were disappointed, as the IRS will not be as “forgiving” with the Taxpayer who passively amends returns for prior years to disclose income from offshore banks, as with the Taxpayers who participated in the special VDP for FBARs.

The IRS has had the VDP for a long time, but last year it became very active with the UBS bank scandal. On July 1, 2009, a federal district judge in Miami authorized the IRS to serve summons to UBS, in search of identities of U.S Taxpayers whom were not reporting income from overseas bank and brokerage accounts, as well as, not filing Form TD F 90-22.1 (Report of Foreign Bank and Financial Accounts). The purposes of the Form TD F 90-22.1 is for U.S. Persons to disclose all foreign bank and brokerage accounts, with an aggregate balance of $10,000, in which they have financial or signature authority. Even though, the Form TD F 90-22.1 is informational only, willful noncompliance is punishable criminally and civilly by severe penalties. Generally, the civil penalty for willful noncompliance can be the greater of $100,000 or 50% of the total balance of the all the foreign bank accounts and unintentional violations are subject to civil penalty of not more than $10,000. The failure to file the TD F 90-22.1 and the filing of a false TD F 90-22.1 are both violations that are subject to criminal charges and prison time. Many U.S. Taxpayers intentionally did not disclose the accounts on the Form TD F 90-22.1 and report income earned in the overseas bank and brokerage accounts to escape the U.S. tax.

However, after UBS agreed to cooperate with the IRS and provide the list of names of their investors with offshore bank and brokerage accounts, many U.S. Taxpayers applied for the VDP with the fear of being exposed. The VDP eliminates the criminal charges and jail time. In addition, under certain circumstances some penalties can be reduced. About 15,000 Taxpayers have been accepted for the IRS VDP before October 15, 2009, but there are more Taxpayers who chose not to participate as of that date.

Some Taxpayers wanted to passively amend prior year tax returns and pay the tax on unreported income presuming that the IRS would treat them in the same manner as the VDP participants. However, the IRS was clear on their decision to not treat these Taxpayers equally. The IRS’s position is firm but fair. The Taxpayers are either VDP qualified, or they are not. The Taxpayers that choose to forgo the VDP and still report the income on amended returns could result in the worst possible situation. The offshore investment company (i.e. UBS, HSBC, etc.) will flag to the IRS the unreported income, but without any protection from VDP.

The recent developments in this matter, with the HSBC Bank possibly cooperating with the IRS and their investors receiving letters from Department of Justice Tax Division, notifying them that they are under criminal investigation, only proves that the VDP is not something that any taxpayer should ignore. Even though some taxpayers are willing to disclose the income and pay taxes, they still are at risk of much stiffer penalties and possibility of imprisonment. It should be noted that Voluntary Disclosure is time consuming and has to be done properly, but it is far more lenient to the non-disclosure or passive filing. It provides the best relief from criminal prosecution and penalties of subsequent IRS discovery of the offshore assets. The Taxpayers should consult with their advisor on this matter.

 
 
 
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