Many tax professionals are experiencing clients coming out of the woodwork this year to discuss foreign bank accounts and what they should do about them. The clients have become concerned about publicity concerning accounts held by Swiss bank UBS for U.S. citizens and whistleblowers identifying holders of foreign accounts at UBS and in Liechtenstein.
UBS has agreed to turn over account information on a limited number of U.S citizens where there was evidence of criminal activity, but a much larger number of accounts remain in litigation, and it remains unclear whether information on those accounts will be turned over. Other foreign banks, seeing the litigation that UBS is involved with, are asking U.S. citizens to close accounts in their banks, fearing being entangled in similar litigation. Those clients have also frequently heard about the significantly increased penalties for failing to file the Foreign Bank Account Report (FBAR) due June 30 of each year.
Once the Internal Revenue Service has the name of an individual with a foreign account and starts a criminal investigation, it may be too late to avoid very significant penalties. Although the June 30 deadline for filing the FBAR has passed, Sept. 23, 2009, has emerged as the next significant deadline. This is the deadline for complying with the IRS's voluntary disclosure program for foreign bank accounts. It is also the deadline for a limited number of taxpayers who may qualify for an extended FBAR filing deadline.
THE POTENTIAL PENALTIES
Although the FBAR reporting requirement came into the law in 1970, it was long a victim of lax enforcement and noncompliance. Since the filing requirement was not part of the tax return, it was usually ignored by tax return preparers. In 2003, however, FBAR enforcement responsibility was shifted to the IRS. Seeing an opportunity to reduce tax noncompliance through the FBAR requirement, in 2004 Congress imposed severe new penalties for failure to file the FBAR.
For non-willful violations, a new civil penalty was imposed not exceeding $10,000 on anyone who violates, or causes any violation, of the FBAR reporting requirements. The penalty applies for each foreign account and for each person required to file an FBAR. The penalty may be waived if the violation was due to reasonable cause and the transaction or balance in the account was properly reported. It is not clear what "proper reporting" means - whether it only requires acknowledging the existence of the foreign account on the tax return or also properly reporting all income from the account on the tax return.
For willful violations, the civil penalty is increased to the greater of $100,000 or 50 percent of the amount of the transaction or the balance in the account at the time of the violation. Under prior law, the maximum penalty was $100,000.
Criminal penalties for FBAR violations were not changed in 2004. They can result, however, in a fine of up to $250,000 or five years in prison, increasing to $500,000 or 10 years in prison where the failure to file is part of a pattern of illegal activity.
THE PREPARER'S RESPONSIBILITY
The FBAR filing requirement remains separate from the tax return filing requirement. The tax return preparer's responsibility is still focused on completion of the foreign account questions on Schedule B of the Form 1040. The return preparer needs to be able to document asking about foreign accounts and the response given by the taxpayer. To keep their clients happy, however, tax return preparers will want to advise those who give a positive response to the foreign account inquiry of the FBAR reporting requirements.
VOLUNTARY COMPLIANCE INITIATIVE
In March 2009, the IRS announced a voluntary disclosure program effective until Sept. 23, 2009. Taxpayers found to have made voluntary disclosure for the past six years will still face accuracy and delinquency penalties on the tax return, but the FBAR penalties will be reduced to a maximum of 20 percent of the amount in the foreign account or foreign entity for the year with the highest aggregate account and asset value. This could still be a significant penalty, particularly if current values in the account have sustained a significant reduction due to the market turmoil over the last couple of years. There are limited circumstances where the penalty could be reduced to 5 percent if the taxpayer at issue did not open the account, there was no activity in the account during their period of control, and all taxes have been paid during their period of control.
Voluntary disclosure does run the risk of being rejected by the IRS if the IRS already has the name of the taxpayer as part of their criminal investigation activities. In that case, voluntary disclosure may only serve to assist the IRS in collecting evidence for its criminal case. However, the IRS insists that the voluntary disclosure program is not intended to be a tax trap for taxpayers.
FBAR FILING EXTENSION
The IRS announced a limited extension of the June 30, 2009, FBAR filing deadline. A person may file the FBAR by Sept. 23, 2009, without being subject to the failure-to-file penalty, if they meet the following requirements:
1. They recently learned of the filing requirement and had insufficient time to gather the necessary information by June 30, 2009;
2. A taxpayer has timely reported and paid tax on all of their 2008 taxable income;
3. Any other person with FBAR reporting responsibility has ensured that all 2008 taxable income of the FBAR has been timely reported; and,
4. A statement is attached to the FBAR explaining why the FBAR is late.
Any client who has previously filed an FBAR may have difficulty establishing ignorance of the FBAR filing requirement.
ADVICE TO THE CLIENT
Many tax professionals seem to feel that it will become ever more difficult in the future to keep foreign financial accounts hidden from the IRS. Even though bank secrecy laws seem likely to survive at least in some form in many of these foreign jurisdictions, information from a third source may in the future be enough to pierce the veil of secrecy.
Many of these professionals are therefore advising their clients that now may be their best chance to come forward with a minimum of risk of civil and criminal penalties. Even if the IRS already has the name of the client, if the IRS feels that the client came forward voluntarily without being aware that the IRS had access to their name, the Criminal Division may treat the taxpayer more favorably than had they not come forward - even if they do not officially qualify for the voluntary disclosure program.
Although many tax professionals are being approached by their clients about the merits of voluntary disclosure, tax professionals may want to make sure that all of their clients are aware of the Sept. 23, 2009, deadline, particularly for the voluntary disclosure program, but also for the FBAR reporting extension.
George G. Jones, JD, LL.M, is managing editor, and Mark A. Luscombe, JD, LL.M, CPA, is principal analyst, at CCH Tax and Accounting, a Wolters Kluwer business.
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