Most people probably do not need to consult an attorney to know that there can be criminal and civil penalties for omitting income from foreign financial accounts on their U.S. tax returns. There is also a separate reporting obligation for these foreign financial accounts apart from any information that must also be provided on a U.S. tax return. The Bank Secrecy Act requires that U.S. persons ― a term that includes citizens and residents ― must file a Report of Foreign Bank and Financial Accounts (FBAR) each year by June 30. The FBAR must be filed with the Financial Crimes Enforcement Network, which is part of the U.S. Department of Treasury, and it is generally required for all persons who have an interest in or signatory authority over a foreign financial account and where the aggregate value of these accounts exceeds $10,000.
In order to promote compliance and encourage the disclosure of foreign financial accounts, the IRS instituted an Offshore Voluntary Disclosure Program (OVDP). This program was first offered in 2009 with successive iterations in 2011 and 2012. The IRS recently modified the OVDP, which is primarily for taxpayers whose failure to report foreign financial accounts and pay taxes on income from those accounts was willful. Under these changes, taxpayers will be required to pay the offshore penalty at the time of their OVDP submission. Also, if before the taxpayer submits an OVDP pre-clearance request it becomes public that a financial institution where the taxpayer holds an account is under investigation by the IRS or Department of Justice, then the OVDP penalty will increase from 27.5 percent to 50 percent.
The IRS also expanded the streamline filing compliance procedures, which were previously only available to non-resident, non-filers. The streamline option now includes additional categories of U.S. taxpayers living outside and inside the United States. It also includes amended tax returns, and there is no longer a requirement that the taxpayer have $1,500 or less of unpaid tax per year. Taxpayers who are under civil or criminal investigation are not eligible for the streamline procedures, but taxpayers who have previously made a quiet disclosure are eligible.
Significantly, the streamline procedures require that the taxpayer certify under penalty of perjury that the taxpayer’s prior noncompliance was not willful. Attorneys will need to ensure that the taxpayer can make such a certification ― something that is likely more difficult now given that the OVDP has been in place since 2009 and the amount of publicity that the IRS’s offshore enforcement efforts against UBS and other Swiss banks have received during this time. Eligible taxpayers who reside outside the United States will have to pay taxes and interest, but the IRS will waive all penalties. Eligible taxpayers who reside inside the United States will have to pay taxes and interest, and they will also have to pay a miscellaneous offshore penalty of 5 percent.