New FBAR Voluntary Disclosure Program
In mid-January I wrote about the FBAR (Financial Bank Account Reporting) rules and pointed out that accounts with offshore online casinos are likely considered foreign financial accounts. In case you forgot:
If the total maximum balances of all foreign bank accounts of a U.S. person during the tax year exceed $10,000, then that person must file the FBAR by June 30 of the following tax year.
Penalties for late filing (or not filing at all) are severe. Indeed, I’m on the record for claiming the severity of the penalties as “ridiculous.” Despite my stance, I would still advise an individual falling under the FBAR rules to submit the form, even if late. That’s even more the case now.
Earlier this week, the IRS announced its 2011 Offshore Voluntary Disclosure Initiative. The purpose of the initiative is to encourage individuals with unreported offshore assets to come forward.
If you haven’t filed the FBAR, why consider participating? Most importantly, by voluntarily disclosing pursuant to the program, the taxpayer is shielded from prosecution by the IRS for tax evasion, relating to the disclosed accounts. Additionally, penalties imposed are less than if merely filing the FBAR late (or not filing and getting caught).
The penalties under the initiative, however, are still pretty harsh. The initiative requires taxpayers to pay 25% of the highest aggregate foreign account balance spanning 2003 to 2010. (The normal penalty rate is 50%.) And that doesn’t include additional tax and interest due, if any. The penalty rate may be reduced to 12.5% if the aggregate accounts balance never exceeded $75,000. Or reduced to 5% for taxpayers inheriting accounts they haven’t actively managed.
In order to participate in the program, account holders must file all documents by August 31, 2011. Note that a taxpayer may first obtain a “pre-clearance notification” from the IRS to make the voluntary disclosure. More details here.
Speculation is this will be the last time the IRS offers an FBAR voluntary disclosure program. File by the deadline or be subject to criminal prosecution and heftier penalties. Seems like a pretty easy call to me.