The IRS has provided a framework for voluntary disclosure requests containing offshore issues, such as previously undisclosed foreign financial accounts and entities (March 23, 2009, memo from Deputy Commissioner Linda Stiff to the commissioners of the Large and Mid-Size Business Division and the Small Business/Self-Employed Division). The policy will remain in place until Sept. 23.
Criminal penalties, civil fraud penalties or other penalties may not apply. Taxpayers making voluntary disclosures of offshore noncompliance can avoid the foreign bank and financial account balance nondisclosure penalty provisions and other provisions pertaining to various information returns, including Form 926, Return by a U.S. Transferor of Property to a Foreign Corporation; Form 3520, Annual Return to Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts; Form 3520-A, Annual Information Return of Foreign Trust With a U.S. Owner; 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; and Form 8865, Return of U.S. Persons With Respect to Certain Foreign Partnerships. Depending upon the facts in a given case, these penalties can cumulatively amount to far more than the total value of the offshore assets.
Consistent basis for resolving cases. To assure consistent treatment of these cases, the IRS has centralized the review and processing of voluntary disclosures with offshore aspects in one office in Philadelphia, which is authorized under the March 23 memo to resolve cases on the following bases:
- Assess all taxes and interest going back six years—the IRS will require the taxpayer to file or amend all returns, including information returns and Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts, commonly known as FBAR;
- Assess either an accuracy or a delinquency penalty on all years (no reasonable cause exception may be applied); and
- In lieu of all other penalties that may apply, including FBAR and information return penalties, assess a penalty equal to 20% of the amount in foreign bank accounts/entities in the year with the highest aggregate account/asset value.
Reduced penalty for special circumstances. Under special circumstances, the 20% penalty is reduced to 5%. These circumstances include:
The taxpayer did not open or cause any accounts to be opened or entities to be formed;
There has been no activity in any account or entity (no deposits, withdrawals, etc.) during the period the account or entity was controlled by the taxpayer; and
All applicable U.S. taxes have been paid on the funds in the accounts or entities (where only account or entity earnings have escaped U.S. taxation).
Submitting voluntary disclosures. Voluntary disclosures should be submitted to the local special agent in charge of IRS criminal investigations, who will verify that the disclosures are timely and refer them to an IRS examiner for civil settlement under the new guidelines.
To benefit from this policy, taxpayers must make voluntary disclosure requests and fully cooperate with the IRS, both civilly and criminally.
Taxpayers with unreported income should retain someone (usually a CPA) to help them determine the full extent of the potential tax and penalties that the IRS could impose before making any disclosures to the IRS. It is also suggested that an attorney be retained to hire the accountant(s) under an agreement that protects the taxpayer’s right to avoid self-incrimination. The accountant should be familiar with the tax rules that apply to U.S. persons who own foreign entities or investments, or have transferred assets to a foreign trust.
More information and AICPA resources on the FBAR are available at the AICPA Tax Center. Additional information and links about the 2009 voluntary compliance initiative have been compiled by Vernon Jacobs, an AICPA International Tax TRP member.
Neil A.J. Sullivan , CPA, is the chair of the AICPA International Tax Technical Resource Panel’s Foreign Bank and Financial Accounts Reporting (FBAR) Task Force.