Tax Problem Attorney Blog

Holders of foreign bank accounts had until today June 30th, 2011, to file a foreign bank account report TDF 90-22.1 (FBAR) with the Internal Revenue Service (IRS). The IRS recently issued a press release reminding foreign bank account holders of FBAR reporting requirements and deadlines.

The June 30th, 2011 FBAR deadline refers to the 2010 calendar year. The reporting requirement applies only to individuals with a financial interest in or signature authority over foreign bank accounts if the aggregate value of those accounts exceeded $10,000 on any one day in 2010. The FBAR is not a tax return and foreign bank holders may be required to file even if their foreign bank account does not generate taxable income. Requests for extensions will not be granted. The FBAR must be received by June 30th (not just mailed by that date) to be considered timely.

Certain individuals may be subject to later deadlines, including foreign bank account holders eligible for extension under IRS Notice 2009-62 or 2010-23 and certain financial professionals.

Willful failure to file an FBAR may result in criminal and civil penalties, including fines that can exceed 6 times the balance of the foreign account. Foreign account holders who file late FBARs may attach a showing of reasonable cause to avoid penalties. Foreign account holders with past unreported taxable income may make a voluntary disclosure under the IRS’s Offshore Voluntary Disclosure Initiative (OVDI) and avoid or decrease penalties.
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Swiss Banks holding offshore bank accounts for U.S. residents may have a settlement deal in the works to avoid prosecution, according to Thompson Reuters. Under the terms of the reported deal, Swiss and European banks would avoid prosecution in exchange for paying a fine, exiting their undeclared offshore banking businesses for Americans, and turning over a list of client names to the Internal Revenue Service (IRS). According to Reuters, the U.S. Justice Department criminal tax investigation of Swiss Banks currently includes, but is not limited to, Credit Suisse, HSBC, Julius Baer, and Basler Kantonalbank. Of course once client names are turned over to the IRS it will be too late to make a voluntary disclosure.

The U.S. Justice Department has been conducting a criminal probe aided by information gathered from U.S. residents maintaining offshore bank accounts at foreign banks. U.S. residents who maintain offshore bank accounts are required to file foreign bank account reports TDF 90-22.1 (FBAR). Willful failure to file an FBAR is a criminal offense and can also result in civil penalties which can exceed 6 times the balance of the foreign account. Thousands of Americans, however, have come forward to reveal their previously undisclosed offshore bank accounts under two voluntary programs offered by the IRS called the Offshore Voluntary Disclosure Initiative (OVDI) and the Offshore Voluntary Disclosure Program (OVDP). As a result of the information gathered under these programs, the IRS has put together a “roadmap” to both Swiss bankers and their intermediaries working with U.S. account holders. In turn this will lead to the IRS discovering more foreign bank account holders who have failed to come forward.
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Many taxpayers who have FBAR (Foreign Bank Account Report) tax problems may be wondering about the statute of limitations or how long the IRS has to come after them. The FBAR civil penalty statute of limitations is six years from the date of the violation, generally June 30th. The criminal FBAR statute of limitations is only 5 years. The FBAR statute continues to run whether or not the FBAR was filed. According to the IRS the FBAR statute may be extended by consent, although there is no explicit statutory authority for this view.

For income tax the general statute of limitations is three years. The IRS has published a guide to its revenue agents about exceptions to the three year statute of limitations that may be applicable. These exceptions are as follows:

1. IRC § 6501 (c)(4) allows the period for assessment OF TAXES to be extended for any period of time agreed upon in writing by the taxpayer and the IRS (generally by submitting Form 872).
2. IRC §§ 6501 (c)(1) and (c)(2) permits assessment at any time if a tax return is false or fraudulent or there is a willful attempt to evade tax.
3. IRC § 6501 (c)(8) permits an assessment within three years after the date certain offshore information returns are filed, including Forms 3520, 3520-A, 5471, and 5472.
4. IRC § 6501 (e)(1 )(A)(i) permits assessment within six years after the later of the due date or date filed if the taxpayer omits from gross income an amount properly includible and that amount is more than 25% of the amount of gross income stated in the return.
5. IRC § 6501 (e)(1 )(A)(ii) allows assessment within six years after the later of the due date or date filed if the taxpayer omits from gross income an amount properly includible therein and such amount exceeds $5,000 and is attributable to one or more foreign financial assets described in IRC § 60380. This exception was added to the law in 2010 and applies to (1) returns filed after March 18, 2010, and (2) returns filed on or before March 18, 2010, if the statute of limitations has not otherwise expired as of March 18, 2010.
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The IRS Offshore Voluntary Disclosure Initiative (OVDI) allowing non-filers of Foreign Bank Account Reports (FBARs) to fix their tax problems without fear of criminal tax prosecutions has been vastly improved for ex-patriate Americans. Americans who reside abroad can enter the OVDI program, and have their FBAR penalty limited to 5% of their undisclosed offshore financial accounts. Up until now the IRS was insisting on an FBAR penalty of 25% of the highest offshore financial account balance, plus 25% of any income generating offshore assets. Thus an American living in say, Australia, who had “offshore” bank accounts in Australia of $1,000,000, plus a piece of rental real estate worth $2,000,000 could have been stuck with a penalty of $750,000 if he failed to file an FBAR.

Under the new OVDI FAQ 52.2 if you reside outside the U.S., make a good faith showing that you have timely complied with all tax reporting and payment requirements in the country of residency; and have $10,000 or less of U.S. source income each year you would qualify. If you already participated in the 2009 offshore voluntary disclosure program (OVDP), and paid a 20% penalty you can reopen the case, and obtain the lower 5% penalty. In addition, non-financial offshore assets are not included in the penalty base. We are recommending the OVDI to most ex-pats as a a good way of avoiding a potential FBAR penalty which could wipe out all of their financial assets.
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The IRS has filed a foreign bank account holders who may have committed failed to file an FBAR with the IRS, and who also failed to report their income from these accounts.

The John Doe summons is similar to the one filed on Swiss banking giant UBS, AG in 2008 which ultimately resulted in the turnover of the names of about 4,550 Swiss bank account owners, and which continues to provide the IRS with a continuing stream of criminal tax fraud prosecutions.

Our tax lawyers don’t expect that the IRS will have much difficulty getting its summons enforced. Indeed HSBC has already been quoted to the effect that “while we haven’t seen the summons, HSBC does not condone tax evasion and fully supports the U.S. efforts to promote appropriate payment of taxes by U.S. taxpayers.”

As previously discussed here, the willful failure to file an FBAR is a criminal tax offense, and also subjects the owner of the offshore account to civil penalties which can exceed 6 times the balance in the foreign bank account.

The IRS is currently conduction a partial tax amnesty known as the Offshore Voluntary Compliance Initiative (OVDI) which can insulate against tax evasion and criminal FBAR charges as well as lowering the civil penalties.
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