Reporting Foreign Bank Accounts (FBAR) for US Tax

Overview

Reporting of foreign income and foreign bank accounts has recently gone from the back burner to the front burner. Some major Swiss banks, including UBS and Credit Suisse, have been providing the IRS with the names of US taxpayers that own "secret" Swiss bank accounts.  US taxpayers that own accounts in other countries may also be facing serious problems.

The minor problem is arranging to pay the back taxes and penalties. The major problem...

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is avoiding tax evasion charges and possible jail time.

A problem unrelated to the "secret" foreign bank account issue is for US taxpayers that either don't report the foreign income by mistake, or pay tax on the income without complete reporting.

Avoiding Tax Evasion Charges & Possible Jail Time

In many situations the IRS will settle on collecting back taxes, penalties and interest rather than going through the hassle of taking a case to court. The settlement typically would include preparing amended tax returns for a number of years. Each amended return would include the tax on the unreported foreign income. As part of the settlement, the IRS might want you to include penalties and interest, as well as tax.

The Offshore Voluntary Disclosure Initiative (OVDI) [sometimes called the Offshore Voluntary Disclosure Program (OVDP) is the Internal Revenue Service (IRS) program that, under the proper circumstances, permits taxpayers to avoid criminal charges and penalties if interest and penalties are paid. Typically, if no tax return was filed, Failure to File (IRC Sec. 6651(a)(1)) penalties need to be computed rather than Accuracy Related penalties (IRC Sec. 6662).

The penalties could include some combination of FBAR, Accuracy Related, Fraud, and Failure to Pay penalties. We have seen settlements where the penalties were reduced to the 20% Accuracy Related penalty and the Failure To Pay penalty.  This is a substantial reduction of penalties. Your representative would need to negotiate with the IRS to get this reduction in penalties.

Unless the IRS is offering an amnesty program, negotiating by offering voluntary disclosure may be the best bet.  To qualify for voluntary disclosure the taxpayer must not be involved with criminal activity, other than tax evasion, and the IRS must not have contacted or tried to contact the taxpayer already about this situation. Thus, if the IRS sends you a letter saying that they know about your foreign bank accounts, it may be too late to use voluntary disclosure.

Typically, you want either an attorney, CPA or EA to represent you. Don't represent yourself!! The problem with using an attorney is that an attorney is very expensive. The problem with using a lesser expensive CPAs or EAs is that CPAs or EAs have no attorney - client privilege with such tax issues. You can have the best of both worlds by arranging to work with an attorney that works with a CPA to do most of the computations at a lower billing rate.  This protects the taxpayer from disclosures by using the precedent set in U.S. v. Kovel. In a Kovel arrangement, the taxpayer pays the attorney who pays the CPA. Since the CPA is working for the attorney, the CPA now has attorney - client priviledge. If you are interested, we can assist you with a Kovel arrangement [303-796-7780].

Proper Reporting Of Foreign Bank Accounts

First, income from a foreign bank account needs to be reported on the tax return.  The same rules apply to reporting foreign income as domestic income. Clearly, currency conversions may be needed. Also, if you pay foreign tax on the foreign income, you might qualify for the US Foreign Tax Credit.

Second, even if you report all of your foreign income, you may need to disclose additional information about your foreign bank account. If you have $10,000 or more in foreign accounts you should file Report of Foreign Bank and Financial Accounts (FBAR)(Form TD 90-22.1).

A New Voluntary Disclosure Program Announced January 2012

Refer to IR-2012-5 for more information.

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