This article was first published on January 10, 2012. It was updated on June 14, 2013, with information relevant to the 2012 and 2013 tax years.
Late FBAR? The IRS Introduces A New Offshore Voluntary Disclosure Program (the third)
The IRS has just opened a new amnesty program, following the success from the previous years’ amnesty programs. Since 2009, the IRS has collected more than $4.4 billion in payments from penalties related to delinquent FBARreports that were disclosed in the previous disclosure programs. From the 2011 program, the IRS has already received more than $1 billion in pre-payments from taxpayers who chose to come forward with their delinquent FBAR reports.
“The IRS recognizes that its success in offshore enforcement and in the disclosure programs has raised awareness related to tax filing obligations. This includes awareness by dual citizens and others who may be delinquent in filing, but owe no U.S. tax. The IRS is currently developing procedures by which these taxpayers may come into compliance with U.S. tax law. The IRS is also committed to educating all taxpayers so that they understand their U.S. tax responsibilities.”
The IRS also stated that anyone who has come forward with their delinquent FBAR reports since the 2011 Offshore Voluntary Disclosure Initiative has closed will be treated under the same guidelines of the 2012 Offshore Voluntary Disclosure Program. You can read more about the 2012 Offshore Voluntary Disclosure Program here: http://www.irs.gov/uac/How-to-Make-an-Offshore-Voluntary-Disclosure.
IRS Offshore Voluntary Disclosure Program For US Expats
Many Americans overseas find themselves in the situation where they are behind on their FBAR reports. The FBAR must be filed with the US Department of the Treasury by any US person who has more than $10,000 in overseas bank or financial accounts. While failure to file typically results in increased penalties and potential criminal persecution, the IRS recently introduced a new Offshore Voluntary Disclosure Program (its third) as a way to encourage individuals to come clean with their offshore accounts.
In mid-December, the IRS issued a note titled Information for US Citizens or Dual Citizens Residing Outside the US, where they state that:
“Note that penalties will not be imposed in all cases. As discussed in more detail below, taxpayers who owe no U.S. tax (e.g., due to the application of the foreign earned income exclusion or foreign tax credits) will owe no failure to file or failure to pay penalties. In addition, no FBAR penalty applies in the case of a violation that the IRS determines was due to reasonable cause.”
Essentially, what this means is that US citizens living overseas will not owe penalties if they do not owe taxes on their tax return AND that the IRS will not impose a penalty for not filing your FBAR if you have a valid reason, such as not knowing you needed to file an FBAR. This is great news for US expats who are behind on their taxes and or FBAR filings. And it really should motivate any late filers to come forward and get caught up before things change.
OVDP vs. OVDI
Expatriates may remember the Offshore Voluntary Disclosure Initiative from 2011, which offered US citizens and US expats the ability to file their delinquent FBAR forms with reduced penalties and no criminal prosecution. Essentially, if you came forward to voluntarily submit your delinquent FBARs, you received more lenient treatment than if the IRS found you through its own searching. The new program offers a similar reduction in penalties, though with slightly higher maximum penalties.
“For the new program, the penalty framework requires individuals to pay a penalty of 27.5 percent of the highest aggregate balance in foreign bank accounts/entities or value of foreign assets during the eight full tax years prior to the disclosure. That is up from 25 percent in the 2011 program. Some taxpayers will be eligible for 5 or 12.5 percent penalties; these remain the same in the new program as in 2011.”
Another difference between the 2011 OVDI program and 2012’s OVDP is the presence of a deadline; while the 2011 OVDI program deadline passed in September of 2011, the IRS and Treasury Department have not yet determined a deadline for the OVDP. They did, however, say that this could change at any time. While there is not a deadline currently, expatriates with delinquent FBAR reports should take this opportunity to come forward and file the required paperwork with the IRS.
More Information About the 2012 Offshore Voluntary Disclosure Program
Click here for a video post that explains the Offshore Voluntary Disclosure Program and the FBAR in more depth. If you need help getting caught up or would like to learn about our expat tax services, please contact us.