Keeping foreign accounts and income secret can be a huge mistake, as numerous prosecutions make clear. The IRS is pushing for global disclosure and compliance, and at this point disclosure seems inevitable.
So if disclosure is inevitable, it is probably a good idea to fully understand and comprehend what is expected of you. So here we go.
You must report your worldwide income on your U.S. income tax return. That’s true even if you live outside the U.S. or pay foreign taxes on your foreign income. Plus, if you have a foreign bank account you must check “yes” (on Schedule B).
In addition, all U.S. persons with foreign bank accounts exceeding $10,000 at any time during the year must file an FBAR by each June 30.
The penalty for failing to file is $10,000 for each non-willful violation. If willful, the penalty is the greater of $100,000 or 50% of the amount in the account for each violation. Each year you didn’t file an FBAR is a separate violation.
There is a new form to be aware of as well. Commencing with your 2011 tax return, you may also need to file an IRS Form 8938 to report your foreign accounts and assets.
OVDP Eligibility. Participating in the IRS Offshore Voluntary Disclosure Program (OVDP) is the best way out for many. But what if the IRS says you’re ineligible? The items below were updated in late June, 2012 to list what could make you ineligible:
John Doe Summons or Treaty Request. The mere fact that the IRS served a John Doe summons, made a treaty request or took similar action does not make every member of the John Doe class or group identified in the treaty request or other action ineligible to participate. However, once the IRS or Department of Justice obtains information under a John Doe summons, treaty request or similar action that provides evidence of a specific taxpayer’s noncompliance with the tax laws or Title 31 reporting requirements, that taxpayer will become ineligible for OVDP.
Appealing Foreign Tax Decision About Disclosure. If a taxpayer appeals a foreign tax administrator’s decision authorizing the release of account information to the IRS, the taxpayer is required to serve notice of that appeal on the U.S. government. Of course, serving the notice may defeat the purpose of the appeal. Still, if the taxpayer fails to serve the notice, he is ineligible to participate in the OVDP.
Action Against Institutions. The IRS may announce that taxpayers with accounts at particular financial institutions are ineligible for OVDP due to U.S. government actions in connection with that institution. Such announcements will provide notice and the prospective date eligibility will end.
JDKatz, P.C. is a full-service law firm focused on tax law and estate planning. We are dedicated to minimizing your existing liability and risks while providing valuable tax planning to streamline your tax issues in the future. Please call us at 301-913-2948 to schedule an appointment to meet with one of our trusted attorneys.