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Frequently Asked Questions for Taxpayers with Undisclosed Foreign Bank Accounts

18th March 2010
By Kevin2 in Taxes
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Over the last year, the United States government has taken a great interest in undisclosed foreign bank accounts. Individual taxpayers who file U.S tax returns, and who have any offshore or foreign accounts must report income from these offshore accounts on their income tax returns. They must also declare any offshore or foreign bank accounts over which they have signatory authority, regardless of whether they receive any income from the account.
It is not illegal to have a foreign bank account but United States taxpayers are required to report information identifying their foreign accounts by filing a Form TDF 90-22.1, Report of Foreign Bank and Financial Accounts, - more commonly known as an FBAR - no later than June 30th. Anyone with an offshore account bank account who doesn't file an FBAR can be hit with both criminal tax penalties, and civil tax penalties.
What are my tax obligations if I have an offshore bank account?

• If a taxpayer has $10,000 USD or more in an offshore account, then he is required to file a Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts, or FBAR; and answer "Yes" to Item 7 of Schedule C on his Form 1040, U.S. Individual Income Tax Return.

What are my penalties if I fail to disclose my foreign account?

• 50% of the account balance for each year the account was not disclosed.
• Income tax on the income earned by the foreign accounts plus interest.
• A fraud penalty of up to 75% of the value of the unpaid taxes.
• A penalty equal to the greater of $100,000 - or 50% of the account balance - for willful failure to file an FBAR, for each offshore account.
• Criminal prosecution for tax evasion for intentional failure to disclose.

Do I have to report and file an FBAR if the assets in my offshore account are under $10,000?

• No, taxpayers only have to report their offshore account if the assets in the account are $10,000 USD or more. However, if a taxpayer has a portfolio of accounts with a bank and the aggregate value of the portfolio of accounts is equal to $10,000 USD or more, then the taxpayer is required to file an FBAR.

Do I have to file an FBAR if my offshore account does not earn income?

• Yes, while a taxpayer may not owe taxes on the account, taxpayers are still required to file a Foreign Bank Account Report and answer "Yes" to Item 7 of Schedule C on their income tax return even if the account does not earn income. If a taxpayer fails to file an FBAR he still could be subject to civil penalties and potential criminal prosecution.

Do I have to report my foreign account if I am living abroad?

• Yes, if the taxpayer is a U.S. citizen or Permanent Resident Alien living abroad, he is still required to file an FBAR and pay all applicable U.S. taxes on the income earned by his foreign accounts. If an individual has acquired immigration status, such as a Permanent Resident Card, or "green card," he has certain obligations under U.S. tax law.

Do I have to report my foreign account even if the assets and income are derived entirely outside of the United States?

• Yes, the United States government taxes its citizens' and lawful permanent residents' world-wide income, regardless of where the income is derived.

Do I have to file an FBAR if my spouse, who is a foreign national, has a foreign account with my name listed as a joint accountholder?

• Yes, if a U.S. taxpayer's spouse is a non-U.S. citizen and has a foreign account, the U.S. taxpayer is still required to disclose the account and file an FBAR by virtue of their signatory authority over the account as a joint accountholder.

What is the Offshore Settlement Initiative Voluntary Disclosure Program?

• The IRS created the IRS Offshore Settlement Initiative Voluntary Disclosure Program to encourage taxpayers to come forward and disclose previously undisclosed offshore accounts in exchange for reduced penalties and the promise not to refer taxpayers for criminal prosecution. However, the October 15, 2009 deadline to participate in the Initiative has passed.

Is it too late to file a voluntary disclosure with the IRS?

• No, while it may be too late to apply to the IRS Offshore Settlement Initiative Voluntary Disclosure Program, it is not too late to file a voluntary disclosure under the IRS's normal procedures.

What are the advantages to filing a voluntary disclosure?

• Under the IRS's traditional Voluntary Disclosure procedures, taxpayers disclose previously undisclosed assets and pay back taxes, interest, as well as a civil penalty. In return, taxpayers avoid the most severe civil penalties, which can often exceed the value of the assets in the account in a given year, and, most importantly, taxpayers avoid criminal prosecution.

Should I have my accountant file a voluntary disclosure for me?

• No, a taxpayer is not protected by the attorney-client privilege if his accountant files a voluntary disclosure, in the event of criminal prosecution. In other words, a taxpayer accountant does not have the same protections with his accountant as he would have with the attorney-client privilege. Also, a taxpayer's accountant could be subpoenaed to testify against the taxpayer, while an attorney cannot. Further, by hiring an attorney, it is possible to extend the attorney-client privilege to the accountant in anticipation of litigation via a Kovel letter. The voluntary disclosure process is complex and sensitive, thus, taxpayers are best served by contacting a tax attorney who is skilled at resolving disputes with the Internal Revenue Service.

I live abroad, should I retain foreign counsel in my country of residence to represent me?

• No, foreign lawyers are not versed in the intricacies of U.S. tax law and may not be licensed to practice before the Internal Revenue Service. Taxpayers are best served by contacting a U.S. attorney licensed to practice in the United States and before the Internal Revenue Service.

Are there advantages to hiring an attorney in Washington, D.C.?

• Yes, the Internal Revenue Service International Voluntary Disclosure Coordinator, responsible for processing voluntary disclosures, is located in Washington, D.C., therefore an attorney licensed to practice and located in the Washington, D.C. metro area is better positioned to provide effective representation.

Can I still participate if I receive an IRS audit letter or information document request?

• No, if a taxpayer has already been investigated and contacted by the Internal Revenue Service, it may be too late to file a voluntary disclosure. If a taxpayer receives a Form 4564, Information Document Request, or audit letter, the taxpayer is best served by retaining a tax lawyer that practices before the Internal Revenue Service and the U.S. Department of Justice before any actions are taken.

My offshore bank closed my account, should I transfer funds before submitting a voluntary disclosure?

• No, if a taxpayer receives a letter from his offshore bank informing him that his account is being closed and instructing the taxpayer to move the funds, contact a tax attorney that specializes in offshore accounts as soon as possible.
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