The benefits of disclosing under the IRS streamlined voluntary disclosure program are often thought of the solution for a client who has 1) not filed their FBAR reports, 2) have undisclosed foreign income, and 3) whose conduct was not intentional (non tax fraud cases). However, the limits of the streamlined disclosure program do not require that you must have all three factors in play to be eligible. If you simply have under-reported foreign income , but you filed all your FBAR reports, and disclosed the assets in your tax return, then you are still eligible to file under the program and get the benefits of the program if you just made a mistake in calculating your income. The main benefit of the program is that the outcome is much more certain than a quiet disclosure (where you just mail in the amended income tax returns). The penalty is five percent of the asset balance, plus tax and interest on the under-reported income. Under a quiet disclosure, you could be charged with higher penalties, or even criminal conduct if the IRS disagrees that your conduct was unintentional. Therefore, while no solution is risk free, the streamlined disclosure may be useful tool in many cases.
Enacted in March of 2010, the Foreign Account Tax Compliance Act, or FATCA as it’s more commonly known, has been the subject of much concern and confusion for many U.S. citizens who are either living abroad or who have foreign-held assets or property. The unpopular piece of legislation was passed in an effort by the U.S. government to keep track of U.S. foreign asset holders and crackdown on offshore tax evasion activities.
FATCA’s provisions apply to U.S. citizens with foreign assets or property that is valued in excess of $50,000. While this requirement seems straight forward enough, many individuals who are subject to FATCA’s terms would likely argue that attempting to abide by the law’s provisions is anything but simple or straightforward.
Consequently, many people who should file under FATCA don’t and the penalties associated with failing to file can be hefty and punitive. In cases where an individual fails to report foreign assets under FATCA requirements and wants to ensure they are compliant with the Internal Revenue Service requirements, the agency offers options—one being participation in theOffshore Voluntary Disclosure Program.
Tax time comes and goes every year, and residents in New York may wonder if filing taxes on foreign accounts on-time is always the best thing to do. Typically, the answer to that question is yes, but those with a first time FBAR, or Foreign Bank Account Report, may benefit from waiting to avoid tax issues. As the deadline for FBAR filings just recently passed, account holders — particularly those who are new to foreign accounts — may wonder how filing now will affect them.
To avoid tax issues, such as the need to amend a return shortly after filing, it is always beneficial to have all necessary information and documents in place. Sometimes, the required information needed to file simply isn’t available in time. While submitting a tax filing after deadline may result in penalties, the cost would be far less than not filing at all.
Some may worry that filing a FBAR is akin to admitting to committing a crime, but that is not the case. While there are those who try to use offshore accounts to hide money — the IRS has collected billions of dollars from these accounts — those that are honest in their transactions should have nothing to worry about. Certain legal protections can be taken to protect these funds from undue tax issues such as fines and audits.
In the president’s most recent proposed budget, a relatively obscure direction appears. It reads that the federal government shall “Provide for reciprocal reporting of information in connection with the implementation of FATCA.” This provision will likely mean little to many Americans and will affect few Americans directly. However, it will impact certain individuals and corporations in significant ways.
FATCA stands for “Foreign Account Tax Compliance Act of 2010.” This legislation helps to ensure that American individuals and companies do not misuse offshore accounts in attempts to evade federal tax liabilities. This important law was inspired partially by a number of tax investigations that revealed significant abuses of the system and evasion of massive federal tax liabilities.
The FATCA mandates that certain foreign financial institutions must search their corporate records for federal tax evaders and file related reports with the U.S. Internal Revenue Service. Although this measure is controversial, many foreign institutions cooperate willingly. However, they have asked that U.S. institutions similarly search for foreign tax evaders and report their findings to appropriate governments and their agencies.
Some of our readers in New York may be familiar with what is known as FATCA, the Foreign Account Tax Compliance Act. The law was passed back in 2010 and is finally scheduled to take effect in 2014. Basically, the law is intended to provide transparency for Americans with foreign bank accounts. Contrary to what some people might think, the law is not intended to restrict people’s ability to put their money wherever they wish; instead, it is intended to require disclosure of where that money is being kept.
This is because income that is earned all over the world is subject to U.S. taxes. Many people may have put their money into foreign accounts because they were more difficult for American authorities to find; banks that developed a reputation for secrecy and discretion became popular havens.
In addition to the requirements of FATCA, people with foreign bank accounts that are worth more than $10,000 must also annually complete the FBAR, the Report of Foreign Bank and Financial Accounts. Failure to do so can result in hefty fines and even time in prison. Even people who did not realize they were supposed to file the document have been found liable and required to pay fines.
In January 2012 the Internal Revenue Service started an offshore voluntary disclosure program, known as OVDP. This program is a result of the positive outcome of similar programs initiated in 2009 and 2011. The 2012 OVDP program does not have an expiration date, but the IRS can choose to end the program at any time in the future. The IRS also has the ability to change the terms of the program at any point, and could decide to increase penalties or limit eligibility. The OVDP will be open until further notice for taxpayers who want to come forward and complete strict requirements.
The 2012 OVDP has the highest penalty rate compared with previous programs. However, this does not mean the program is without benefits to taxpayers. The main purpose of the program is to encourage taxpayers to disclose any foreign accounts, rather than risk being caught by the IRS and have the possibility of criminal prosecution and harsh fines. If taxpayers disclose their information they will have to pay back taxes, interest, and penalties but no longer face criminal tax charges. Taxpayers who are currently under any type of investigation by the IRS, including civil, regardless if it relates to undisclosed foreign accounts or entities, are not eligible for the program.
Some taxpayers have disclosed unreported foreign accounts on amended returns. Returns that are amended to include undisclosed foreign income are known as ‘quiet disclosures’ are still eligible for the OVDP and the penalty system. These applicants will submit an application with the original and amended returns to the Voluntary Disclosure coordinator. Taxpayers who make quiet disclosures should understand that the IRS often audits amended returns to ensure accuracy, and there is a risk of being examined as well as facing criminal tax charges if they decide to report these finances but not file with the OVDP. Therefore, this is not a recommended course of action.
The Internal Revenue Service has increased the scrutiny of overseas bank accounts and has rescinded amnesty for some individuals who disclosed their overseas accounts and were accepted into the program.
Taxpayers who have offshore accounts are required to file a Report of Foreign Bank and Financial Accounts (FBAR) annually with the Treasury. Taxpayers who do not file their FBARs can be fined for each year they fail to file.
Since 2009, the IRS has gone after taxpayers who hide money abroad in overseas accounts. The IRS has offered amnesties to taxpayers who confess that they have undisclosed accounts abroad. The IRS has repeatedly stated that in order to be accepted into the amnesty program, taxpayers must give themselves up to the IRS before they are discovered by the IRS. Once accepted into the amnesty program, the taxpayer no longer faces criminal prosecution. However, they will need to pay any interest, penalties and back taxes owed.
To solve a tax problem, the Internal Revenue Service has released new information and updates to the Voluntary Classification Settlement Program so that businesses, tax exempt organization or government entities can now participate, and these organizations can do so even if they have IRS tax problems for a small period.
The Voluntary Classification Settlement Program, or VCSP, has been expanded by the IRS. The VCSP is a voluntary program that allows taxpayers to reclassify workers as employees. The program applies to taxpayers who currently treat their workers as independent contractors or nonemployees, but want to prospectively treat the workers as employees. This is done so that taxpayers can receive partial relief from federal employment taxes in future tax periods. The expansion will now allow more taxpayers to be able to reclassify and take advantage of this tax saving program.
In order to do this, the IRS has modified eligibility requirements. It is now possible for more employers to apply for the program, by opening it up to businesses, tax-exempt organizations, and government entities.
The Internal Revenue Service has in place a plan to help United States citizens residing abroad with their taxes. U.S. citizens abroad, including dual citizens now have more access to help with tax obligations, and for those citizens with foreign retirement plans, resolving pension issues.
This new plan went into effect on September 1, 2012, and the 2012 tax year will be the trial run. The IRS has provided new options so that U.S. citizens abroad who may have fallen behind on filing tax returns can catch up with their obligations. However, this only applies to U.S. citizens who are low compliance risks and owe $1,500 or less in tax for any year.
The most common mistake that U.S. citizens living overseas make with their taxes is either not filing their Federal Income Tax Returns or Reports of Foreign Bank and Financial Accounts (FBARs). The IRS has recently overhauled the FBAR guidance (https://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Report-of-Foreign-Bank-and-Financial-Accounts-(FBAR)), so that taxpayers can better understand the requirements.
On January 17, 2013, the United States Treasury Department released their finial regulations for the implementation of the Foreign Account Tax Compliance Provisions (FATCA) from the Hiring Incentives to Restore Employment Act of 2010. The U.S. Congress put forth these rules to prevent U.S. taxpayers from using offshore account and investments to evade paying U.S. taxes, and FBAR penalties.
U.S taxpayers with foreign accounts abroad, not limited to bank accounts, brokerage accounts, mutual funds or trusts, must report these funds to the Internal Revenue Service. These accounts are reported to the IRS by a Report of Foreign Bank and Financial Accounts (FBAR) report. The FBAR is required because financial institutions outside of the U.S. do not have the same requirements in reporting as financial institutions within the U.S. The FBAR is a way for the U.S. government to ensure that taxpayers are not using foreign financial accounts to circumvent paying the proper amount of taxes.
If foreign countries who agree to the FATCA program do not comply with the requirements, foreign financial institutions will be subjected to a 30% US withholding tax on U.S.-source interest, dividends, and investment income. The institutions are not limited to depositary or custodial institutions, therefore private equity funds and investment funds are also considered financial institutions under FATCA. This means that equity and investment funds will be subject to penalties if the U.S. taxpayer fails to file an FBAR.