Foreign Tax Accounts – Requirement, Representation, Answers to Questions 1-866-700-1040
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The Offshore Voluntary Disclosure Program
The IRS began an open ended offshore voluntary disclosure program (OVDP) in January 2012 on the heels of strong interest in the 2011 and 2009 programs. The IRS may end the 2012 program at any time in the future.
IRS collected over $5.5 Billion Dollars as a result of the first two programs when over 33,000 filers came forward to avoid criminal penalties and the possibility of jail time.
The IRS Offering
The IRS is offering people with undisclosed income from offshore accounts another opportunity to get current with their back tax returns filings.
The 2012 has a much higher penalty rate than the previous program but offers clear benefits to encourage taxpayers to disclose foreign accounts now rather than risk detection by the IRS and possible criminal prosecution.
Receiving Foreign Income
Many United States citizens and resident aliens receive income from foreign sources. There have been recent reports about the interest of the Internal Revenue Service in taxpayers with accounts in Liechtenstein. It should be noted that the government has gave way to US demands and are currently turning over the records of bank accounts and financial dealing of US citizens to authorities making the request. Yes, Liechtenstein gave way to US pressures.
The interest of the IRS however extends beyond accounts in Liechtenstein to accounts anywhere in the world. The IRS and the DOJ reminds you to report your worldwide income on your US tax return.
US Citizens and Resident Aliens
If you are a U.S. citizen or resident alien, you must report income from all sources within and outside of the U.S.
This is true whether or not you receive:
1. Form W-2 Wage and Tax Statement, a Form 1099 (Information Return)
2. or the foreign equivalents.
If you are a US citizen or resident alien, the rules for filing income, estate and gift tax returns and for paying estimated tax are generally the same whether you are living in the U.S. or overseas abroad.
Hiding Income Offshore
Not reporting income from foreign sources may be a crime punishable with prison time. Both the IRS and the Department of Justice keeps actively posting those convicted of these crimes.
The IRS and its international partners are pursuing those who hide income or assets offshore to evade taxes.
Specially trained IRS examiners call Revenue Agents or CID Specialist are focused on aggressive international tax planning, including the abusive use of entities and structures established in foreign jurisdictions. The current Obama Administration is current funding the IRS with over $500 M this next year to go after tax cheats.
The goal is to ensure US citizens and residents are accurately reporting their income and paying the correct tax.
Foreign Financial Accounts
In to reporting your worldwide income, you must also report on your U.S. tax return whether you have any foreign bank or investment accounts.
The Bank Secrecy Act requires:
a. that you to file a Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (FBAR), if:
1. You have financial interest in, signature authority, or other authority over one or more accounts in a foreign country and,
2. The aggregate value of all foreign financial accounts exceeds $10,000 at any time during the calendar year.
Consequences for Evading Taxes on Foreign Source Income
A taxpayer will face serious consequences if the IRS finds you have unreported income or undisclosed foreign financial accounts. These consequences can include not only the additional taxes, but also substantial penalties, interest, fines and even imprisonment.
If you are a U.S. citizen or resident alien, the rules for filing income, estate, and gift tax returns and paying estimated tax are generally the same whether you are in the United States or abroad. Your worldwide income is subject to U.S. income tax, regardless of where you reside.
When to File
If you are a U.S. citizen or resident alien residing overseas, or are in the military on duty outside the U.S., on the regular due date of your return, you are allowed an automatic two month extension to file your return and pay any amount due without requesting an extension.
For a calendar year return, the automatic 2-month extension is to June 15.
If you are unable to file your return by the automatic 2-month extension date, you can request an additional extension to October 15 by filing form 4828 before the automatic 2-month extension date.
However, any tax due payments made after June 15 will be subject to both interest charges and failure to pay penalties.
FBAR Penalties
The IRS has been delegated authority to assess FBAR as civil penalties.
There are civil penalties for negligence, pattern of negligence, non-willful, and willful violations.
Whenever there is an FBAR violation, the examiner will either issue the FBAR warning letter, Letter 3800, or determine a penalty. See IRM 4.26.17 for the Letter 3800procedures
The penalties should be asserted only to promote compliance with the FBAR reporting and record keeping requirements.
In exercising IRS discretion, tax examiners or agents should consider whether the issuance of a warning letter and the securing of delinquent FBARs, rather than the assertion of a penalty, will achieve the desired result of improving compliance in the future.
FBAR civil penalties have varying upper limits.
This is a noteworthy and extremely important,
The IRS tax examiner has discretion in determining the amount of the penalty, if any. The tax examiner or agents has discretion to make necessary changed because the total amount of penalties that can be applied under the statute can greatly exceed an amount that would be appropriate in view of the violation.
Tax Examiners and Agents are expected to exercise discretion, taking into account the facts and circumstances of each case, in determining whether penalties should be asserted and the total amount of penalties to be asserted. Call us for more details on this subject matter because here is where you save the bucks.
FBAR penalties do not have a set amount IRS has developed penalty mitigation guidelines to assist examiners in the exercise of their discretion in applying these penalties.
The mitigation guidelines are only intended as an aid for the examiner in determining an appropriate penalty amount.
The tax examiner or Agent must still consider whether a warning letter or a penalty amount that is less than what would be called for under the mitigation guidelines would be more appropriate given the facts and circumstances of a particular case.
Case study.
If an individual failed to report the existence of five small foreign accounts with a combined balance of $30,000 for all five accounts but the income from each account was properly reported and the taxpayer made no effort to conceal the existence of the account, it may be more appropriate to issue a warning letter rather than assert penalties under the mitigation guidelines.
FBAR penalties are determined per account, not per unfiled FBAR, for each person required to file.
Penalties apply for each year of each violation. As noted above however tax examiners or agents are expected to exercise discretion, taking into account the facts and circumstances of each case, in determining whether penalties should be asserted and the total amount of penalties to be asserted.
There may be multiple FBAR civil penalty assessments arising from one account.
FBAR civil penalties can apply to each person with a financial interest in, or signature or other authority over, the foreign financial account.
Thus there may be multiple penalty assessments if there is more than one account owner or if a person other than the account owner has signature or other authority over the foreign account. Each person can be liable for the full amount of the penalty.
Foreign Tax Accounts – Requirement, Representation, Answers to Questions
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