US tax authorities have initiated a new voluntary disclosure program for US taxpayers with foreign accounts on January 9, 2012. The IRS also noted some interesting statistics regarding its previous two foreign account voluntary disclosure programs as well as its audit programs. Among the more notable statistics, the U.S:
Has currently collected more than $4.4 billion dollars from US taxpayers who participated in the previous two programs;
Audited 1 out of 8 taxpayers reporting $1 million dollars or more of income (approximately a 50% increase from the prior year), Audited 1 out of 25 taxpayers reporting $200,000 or more of income (approximately a 30% increase from the prior year).
Steven Miller, deputy IRS commissioner for services and enforcement, provided an explanation for the dramatic increase in the above cited high income taxpayer audit rates. “We have done a lot of work in the offshore area,” said Mr. Miller when discussing the increased audit rates. This explanation is in accordance with current IRS commissioner Douglas Shulman priorities for the agency. Commissioner Shulman has focused, as a top priority, the agency’s extensive resources on high income and high net worth individuals with a particular focus on US compliance for foreign accounts for these individuals over the last few years. Commissioner Shulman launched two prior voluntary disclosure programs to encourage these taxpayers with noncompliant foreign accounts to come forward voluntarily and avoid criminal prosecution.
The IRS formally announced a third foreign voluntary disclosure initiative to enable U.S. persons to remedy any prior noncompliance without criminal prosecution after netting approximately 33,000 nonfilers in its first and second initiatives over the last few years. Specifically with respect to the 2012 voluntary disclosure initiative, it imposes slightly higher penalties than the prior voluntary disclosure initiatives, but still allows qualifying participants to obtain certainty about avoiding criminal prosecution and the imposition of penalties by the IRS. The current initiative does not have a specific expiration date and will continue until the IRS decides to terminate it. Further, the IRS has authority to change the terms at anytime, which should encourage taxpayers to act early before the penalty rates are inevitability increased.
The definition of what constitutes a foreign account is quite broad, and includes all accounts over which an individual or business has signature authority. The definition of who is required to file on behalf of such accounts is quite broad as well, often causing the beneficial owners of accounts legally owned by another (trusts, business entities, etc.) to be reportable by those beneficial owners.
For Taxpayers seeking to participate in the initiative, the IRS will require the participant to agree with the following terms if the participant otherwise qualifies (i.e., is not currently under an IRS investigation or audit and income is from legal sources):
1. Payment of a 27.5% penalty on the highest aggregate annual balance for the unreported foreign account during the prior eight full tax years (reduced to 12.5% when the balance in all foreign accounts does not exceed $75,000 during these years, and reduced to 5% for certain inherited accounts);
2. Payment of any U.S. income tax due on unreported income for an unreported account during the prior eight full tax years and,
3. Payment of a 20% penalty on any U.S. income tax due under number two.
Participants accepted into the initiative must file amended returns and make an arrangement for payment of all taxes, interest, and penalties. Participants have the option of foregoing the standard penalty rates after being accepted into the voluntary disclosure program and request a full examination of their returns. The examination division will recommend any resulting penalties, which may be higher or lower than the standard penalties.
This initiative can be modified or terminated at the discretion of the IRS. Therefore, the time frame for determining whether to participate and arranging for the appropriate filing and payments is relatively short. Hence, prompt action is required if you intend to participate in the initiative.
It is also important to note that Taxpayers accepted into the initiative must also agree to surrender certain defenses in order to participate in the initiative. The surrender of these defenses could result in a significant reduction in the above monetary penalties. Accordingly, the decision regarding whether to participate in the voluntary disclosure initiative ultimately turns on a participant’s facts and circumstances as well as the participant’s risk tolerance with the IRS. Other unpublicized procedures are available to reduce criminal exposure yet retain any defenses you may be entitled to; however, such procedures do not provide the same level of certainty that can be obtained from participating in the initiative.
Disclosure to the IRS involves a number of strategic decisions that can have broad implications. Disclosure should not be undertaken without qualified professional assistance.
Lastly, Form 8938, Statement of Specified Foreign Financial Assets, (“Form 8938”) is a new reporting form. Form 8938 will be used to report certain foreign financial assets as required as part of the Hiring Incentives to Restore Employment Act (“HIRE Act”), which was signed into law on March 18, 2010 by President Obama. Form 8938 is effective for 2011 and future tax years. The form will typically be attached to your annual federal income tax return if you have a filing requirement. Please keep in mind the Form 8938 a is separate and distinct reporting form from the Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts , commonly referred to as FBAR. Individuals may be required to file both reports, depending on their specific facts for each particular year. We will address this issue in detail in a coming newsletter focused on foreign planning and compliance. If you have any concerns or issues as your tax returns become due, please do not hesitate to contact our office for more information.