News & Articles

IRS ANNOUNCES AMNESTY PROGRAM FOR UNDISCLOSED FOREIGN BANK ACCOUNTS

06 / 08 / 2009

On March 23, 2009, the IRS announced that it has invoked an amnesty program for taxpayers that have used undisclosed foreign accounts and undisclosed foreign entities to avoid or evade U.S. tax, using the IRS' Voluntary Disclosure Practice. 
 
According to the IRS, this step was taken in order to centralize the civil processing of offshore voluntary disclosures and offer a uniform penalty structure for taxpayers voluntarily coming forward, and bring these taxpayers into compliance.  
 
Of course, a voluntary disclosure must adhere to procedures set forth in the IRS Internal Revenue Manual.  In a FAQ released on May 6, 2009, the IRS sought to address questions that have arisen about the program.  The Voluntary Disclosure program is not to be used by those who have signature authority over foreign bank accounts that were used by taxpayers where all amounts were reported and tax paid on all taxable income.   
 
Perhaps the most controversial development is that the IRS has now made it known, in its FAQ, that it is not in favor of "quiet" disclosures (i.e., where amended returns are filed and taxes and interest paid for previously unreported offshore income, but there is no formal notice made of the disclosure to the IRS).   Also, hypothetical, anonymous disclosures do not satisfy the rules on the making of a voluntary disclosure, so that if the IRS were to then receive information and begin an examination, this may negate any opportunity to participate in a voluntary disclosure. 
 
In one example, the IRS FAQ reveals how on a $1 million deposit that has grown by way of interest, to $1.3 million in the year in aquestion.  A taxpayer coming forward, using the voluntary discosure program, might expect to pay $105,000 of tax, a negligence penalty of $21,000 (20% times tax), and an additional penalty, in lieu of the FBAR penalty, in the amount of $260,000. 
 
But, if the taxpayer does not come forward, the taxpayer faces up to $2.3 million in tax, penalties and FBAR penalty, plus interest, and the risk of criminal prosecution.  The tax and penalties are as noted above, but the FBAR penalties can total up to $2.175 million for willful failure to file complete and correct FBARs, and also risk the application of the 75% fraud penalty.
 
These rules also apply to entities. And, if a taxpayer doesn't have the ability to fully pay all taxes and interest, it may be possible for the IRS to accept payment arrangements.  However, the burden will be on the taxpayer to show inability to pay to the satisfaction of the IRS.
 
The FAQ provides an address of the place where taxpayers are to file delinquent T.D. Form 90-22.1 (Report of Foreign Bank and Financial Accounts)(known as FBAR). 
 
A September 23, 2009 deadline for those seeking amnesty under these provisions.
 
Tax Notes Today, May 7, 2009 (Doc 2009-10280).