Do you have income overseas you forgot to report? Did Grandpa leave you his foreign bank account when he passed away? If you have foreign bank accounts holding more than $10,000 in the aggregate anytime during the year, you are required to file an FBAR (Report of Foreign Bank Accounts) by June 30th of the following year. It doesn’t matter whether the foreign accounts generate income or not; just owning them, or having signature authority, requires you to file. (For more information regarding the FBAR, click here: Foreign Asset Reporting)
If the thought has crossed your mind to not file and hope for the best, think again. With the increasingly aggressive tactics being taken by the U.S. Treasury and Justice departments, this has become a very risky proposition. The U.S. is entering into settlements with many foreign banks that provide for fines in exchange for nonprosecution agreements for banks that facilitated American tax evasion. As part of these settlements, the foreign banks hand over the names of their U.S. customers. Moreover, in July 2014 the Foreign Account Tax Compliance Act (FATCA) will go into effect, requiring international financial institutions to turn over all the information on their US account holders.
In 2009, as the IRS became aware of increased offshore tax abuse, it initiated the formal Voluntary Disclosure Program for offshore accounts. While making a voluntary disclosure doesn’t guarantee immunity from prosecution, taxpayers making truly valid disclosures are rarely, if ever, prosecuted.
It’s important to realize that the Voluntary Disclosure Program essentially sets up a race between you and the IRS. In order to avoid criminal prosecution you must come forth before the IRS comes knocking. A growing number of foreign banks are sharing American accountholder information with the IRS, so time is of the essence.
While the current voluntary disclosure program is currently running indefinitely, the rules can change at any time. The FBAR penalty has been raised in 2012 to 27.5% of the largest balance during the period covered by the voluntary disclosure. Sounds like a steep price to pay? The penalties are far greater if you don’t “get with the program” and then get caught. In addition, disclosing now allows you to transfer the money to your American accounts as well as to implement gifting and many other estate planning strategies.