Even though the deadline has passed for taxpayers with foreign bank accounts to voluntarily step forward and disclose them to the IRS, it still makes sense to do so.

While the Foreign Bank Account Reporting requirement has been around since 1970, the section requiring the filing of Treasury Form 90-22.1, Report of Foreign Bank and Financial Accounts, or FBAR, has only been seriously enforced in the past few years. The provision applies to a person having an interest in or signature or other authority over a bank, securities or other financial account in a foreign country if the aggregate value of their accounts exceeds $10,000 any time during the year.

For someone who is unfamiliar with the penalties involved for noncompliance, they may come as a shock. “The highest civil penalty could be 50 percent of the account balance per year,” said David Gannaway, a principal in Citrin Cooperman’s Valuation and Forensic Services Group and a former special agent with the IRS Criminal Investigation division.

“That could be more than the value of the account,” he observed.

Two voluntary compliance programs starting in 2009 allowed taxpayers who had failed to report their foreign accounts to come forward and pay greatly reduced penalties: 20 percent of the highest account balance for only one year in the first program, and 25 percent for only one year in the second program, according to Gannaway.

The good news is that despite the deadline having come and gone, taxpayers can still voluntarily report their accounts and get reduced penalties. “They’ve always had voluntary programs,” said Gannaway. “This one is specific to the offshore accounts.”

The sooner taxpayers do come forward, the better, Gannaway indicated. “If you get a letter from the IRS saying you’re under audit, you won’t qualify for the program or for the lower penalties,” he said. 

“The taxpayer initiates the process by sending in a pre-clearance request to the Lead Development Center at the Philadelphia IRS office,” he said. “The actual FBAR, TD F 90-22.1, isn’t filed with the tax return. It gets sent to the IRS Detroit Computing Center. Unlike a tax return which can be sent by the due date, it has to be received by June 30 of the following year.”

For those who do come forward and are not under investigation or audit, the penalty will be greater than the reduced penalty available under the voluntary programs but will be far less than they would otherwise, Gannaway observed.

“We don’t expect the penalty to be lower than 25 percent of the highest account balance for one year, but we also don’t believe it will exceed 50 percent of the highest account balance,” he said. “Cases that have been prosecuted criminally only included 50 percent of the highest account balance. Although it’s not in print, that’s what people working these cases feel the range should be.”

Cooperation between governments is increasing the pressure on foreign account holders to come forward, he noted.

“Banks in Switzerland are turning over records to the Swiss government, and the Swiss government is turning over information to the IRS,” said Gannaway. “The IRS is matching up accounts to the voluntary disclosure program. If there’s no match, they may decide to begin a criminal investigation or start an audit. A great many people didn’t come forward because they thought their bank wouldn’t cooperate. But it appears that the banks have been cooperating and the IRS will soon have the information.”

And that’s why taxpayers with foreign accounts need to begin the disclosure process soon.

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