In an effort to avoid tax obligations, people were opening bank accounts abroad so the Internal Revenue Service could not track or tax the taxpayer’s true income. Under U.S. tax law, U.S. citizens and permanent residents are required to report any income from foreign bank accounts. The fact that the income is not reported to the IRS on an information return does not alter the legal obligation of the U.S. citizen or resident.
A foreign bank account is required to be disclosed on Form 1040, Schedule B, Part III. In addition, Form TD F 90-22.1 must be filed by June 30th of each year the taxpayer maintains an offshore account to disclose the location and other information about accounts with a cumulative value of more than $10,000 at any time during the prior calendar year.
The IRS still feels that taxpayers are evading taxes by creating offshore accounts and not complying with reporting laws. To curb the tax cheats, the IRS created a program designed to lure tax evaders with reduced penalties and no jail time if the tax offender offers up information about the offshore bank accounts and pay back taxes
U.S. citizens living overseas are also required to give an annual Report of Foreign Bank and Financial Accounts (FBAR) to the IRS. Recently, whistleblowers have alerted the IRS to unreported offshore bank accounts.
Those who have not yet disclosed their foreign assets should do so as soon as possible, because the penalties of nondisclosure can be severe. Consequences may include an IRS audit, heavy fines and high interest charges, or even criminal prosecution.
Offshore account holders cannot attempt to close the bank accounts in order to avoid disclosure or penalties for nondisclosure. However, taxpayers delinquent in filing an FBAR can still fulfill the IRS’s requirements.
Overseas account holders can determine if they are eligible for the IRS’s Offshore Voluntary Disclosure Program (OVDP) or the newer efficient FBAR program.
To participate in the OVDP, a taxpayer must submit eight amended tax returns and FBARS to the IRS, along with tax payments, penalties and interest. Taxpayers must also complete a questionnaire to determine their risk for noncompliance. If it is determined that an individual is low risk, they may be eligible for the program, which means submitting their 2009, 2010 and 2011 tax returns to the IRS, as well as six years’ worth of FBAR documentation.
If an individual chooses the newer, more streamlined FBAR program, they can no longer submit FBARs through the OVDP. Because the offshore account rules can be complex, it is best to consult a tax attorney. An attorney can help you determine which program you qualify for and make sure you meet all deadlines and file the necessary paperwork to avoid stiff penalties.