April 12, 2010

IRS Extends FBAR Voluntary Disclosure Initiative Until October 15, 2009

By Diance Giordano, Tax Partner

IRS Extends FBAR Voluntary Disclosure Initiative Until October 15, 2009

The IRS has issued Notice IR-2009-84, which extends the deadline on its foreign reporting disclosure initiative from September 23 until October 15. The program, announced in March, was originally scheduled to last only six months. The IRS decided to extend this deadline after receiving repeated requests from tax practitioners and attorneys around the country. The extension will allow tax preparers and attorneys the necessary time to interview and advise their backlog of taxpayers with these hidden accounts, and prepare the necessary paperwork to qualify for the special penalty provisions. Taxpayers who do not voluntarily disclose hidden offshore accounts by the new deadline will be subject to harsher civil penalties and possible criminal prosecution. The IRS also further confirmed that it will issue no further extensions.

U.S. persons must disclose all foreign accounts provided the aggregate value exceeds $10,000. Over the past year, the IRS has aggressively attempted to locate undisclosed offshore bank accounts of U.S. taxpayers. In one very highly publicized case, a federal judge issued an order authorizing the IRS to request information from Switzerland-based UBS about U.S. taxpayers who may be using Swiss bank accounts to evade federal income taxes.

The IRS is seeking additional compliance through a voluntary disclosure program. The program’s central focus is to provide reduced penalties for delinquent filings of Foreign Bank Account Reports (FBARs) and foreign information returns (such as Forms 5471 and 3520) made by taxpayers who qualify. Special procedures apply in the case of submissions of delinquent FBARs and other information returns which may include the need to attach statements and income tax returns. The program is aimed at individuals who have knowingly evaded taxes by failing to report income from offshore accounts. Individuals are now being offered an amnesty, enabling them to become compliant and avoid substantial civil penalties, which if later detected by the IRS, can amount to 75 percent of the unpaid tax. The penalty for a non-willful failure to properly report a foreign account is $10,000. If the failure is willful, the civil penalties skyrocket to the greater of $100,000 or 50% of the transaction (if the failure involves a transaction) and of course there are significant criminal penalties.

According to the IRS Web site, taxpayers who reported and paid tax on all their 2008 taxable income, but only recently learned of their FBAR filing obligation and have insufficient time to gather the necessary information to complete the FBAR, should file the delinquent FBAR report according to the instructions and attach a statement explaining why the report is filed late. For more information, see www.irs.gov.

The extension deadline applies to the following forms:

  • FBAR-Form TDF 90.22-1
  • Form 3520-Annual Information Return of Foreign Trust
  • Form 926-Return by a US Transferor of Property to a Foreign Corporation
  • Form 8621-Return by a Shareholder of a PFIC or QEF
  • Form 8865-Return of US Persons with Respect to Foreign Partnerships
  • Form 8858-Return of US Persons with Respect to Foreign Disregarded Entities
  • Form 5471—Information Return of U.S. Persons with Respect to Certain Foreign Corporations
  • Form 5472—Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business

Under separate extensions, the IRS also extended the filing deadline for certain other FBAR filings applicable to persons having only signature authority over, but no financial interest in the foreign account and persons with a financial interest in or signature authority over a foreign commingled fund. Such persons have until June 30, 2010 to file an FBAR for 2008 and earlier years with respect to these accounts.

Taxpayers who have not disclosed foreign accounts should immediately seek the advice of a tax professional. The IRS’s voluntary disclosure program may allow taxpayers to avoid harsh penalties and prosecution, but the deadline to file is fast approaching.. The benefits of the IRS initiative are only available to taxpayers who come forward and make a voluntary disclosure.