Tax Traps - US Citizens And US Tax Resident Foreign Nationals With Assets Abroad Foreign Bank Accounting Reporting Form TD F 90-22.1
The $10,000 Penalty Scheme
A few notorious cases of international tax abuse have resulted in our politicians enacting a vindictive penalty scheme. While the original target of this legislation was wealthy US citizens hiding money offshore, the rules now apply to all US "tax residents" which includes foreign nationals on nonimmigrant visas, and US citizens and lawful permanent residents residing here and abroad. Tax treaties will offer no protection from these penalties.
The penalty for a simple reporting failure (failure to file the FBAR by June 30 each year or failure to properly disclose offshore financial accounts) is $10,000 and as noted below it can get worse.
Historically IRS FBAR enforcement has been lax and a lack of compliance resulted. Tax advisors often ignored the form and most tax software simply defaults to "No" on the Schedule B (Form 1040) question asking if you have an offshore bank account.
That environment is now changing; the Obama administration is aggressively going after offshore reporting failures; and, due to the worldwide financial crisis, expect the trend towards increased financial transparency and international cooperation to continue. It is not wise to think you will stay under the radar screen and these violations can easily cross the line into a criminal matter.
FBAR reporting applies to US tax residents who have an ownership interest or signature authority over financial accounts abroad that total in the aggregate more than $10,000. This has turned into an expanding definition and covers all kinds of "offshore" financial accounts except direct ownership in share certificates or other assets. As in all these cases when it comes to apply a government definition to the real world a great deal of uncertainty arises. The instructions to the October 2008 revision to Form TD F 90-22.1 must be consulted.
Compliance failure leaves a fertile and rewarding ground for IRS enforcement, as FBAR's received even one day late can generate a $10,000 penalty for non-willful violations. The relevant law can be found in 31 USC Sec. 5311-5331. This is non-tax legislation (the "Bank Secrecy Act"). Initially these rules were administered by the Financial Crimes Enforcement Network - Department of the Treasury and were delegated to the IRS in 2003.
To make matters worse, there is a new penalty for willful violations; the greater of $100,000 or 50 percent of the balance in the account. "Willful" has been defined as a "voluntary intentional violation of a known legal duty"(Ratzlaf v. United States, 510 U.S. 135 (1994)).
For those with compliance failures here, a window of opportunity exists to correct matters with reduced or eliminated penalty.
On May 6, 2009 the IRS issued an announcement in the form of a FAQ addressing questions that have arisen concerning the recent revisions to their Voluntary Disclosure Program. In a nutshell:
For those who do not have unreported offshore income - but did not file FBARs, the IRS has stated that no penalty will be imposed if you file the unfiled FBARs by 23 September 2009 with copies of tax returns for the relevant years. This is good news for these individuals provided they have no unreported income and comply with the deadline.
There is no excuse for US taxpayers who intentionally avoid reporting offshore income. They must come forward and deal with the alternate penalty regime that is now offered or face more serious difficulties down the road. The problem is that there are a number of fairly innocent categories of taxpayers who can get seriously hurt by this new enforcement initiative.
Inequities are likely to result in following areas:
The following briefing note has been produced the Law Office of George J. Hayduk. This note is for informational purposes and does not represent tax or legal advice. For further information please visit www.expattaxandlaw.com. This briefing note is part of a series that addresses tax and legal issues for the international person with a US connection.
George J. Hayduk is a former member of AILA and is a member of the Connecticut Bar. His practice is limited to tax and legal matters that impact the international family with a US connection. Mr. Hayduk is a 1984 graduate of Hofstra Law School and a has MBA in Finace from Iona College. He has published numerous artilces about international pension and retirement planning matters. Visit www.expattaxandlaw.com for more details on FBAR reporting and IRS offshore enforcement. His blog can be reached through his website.
The opinions expressed in this article do not necessarily reflect the opinion of ILW.COM.