When people read the words “IRS” and “foreign account,” their first thought often is to ignore it, because they do not think it applies to them. However, many people are surprised to learn that they actually do have foreign assets to report. Here are some examples:
- They may have worked overseas in the past and earned the benefit of a retirement while working for the foreign employer.
- They may have an account in a foreign country that was opened long ago but has been dormant for some time.
- They may own an investment in their portfolio that is subject to reporting requirements.
Further, if at any time the combined balance of their reportable foreign accounts exceeded $10,000, they were out of compliance with their foreign account reporting and perhaps did not even know it.
Being aware of these foreign assets is the first step—the next is getting into compliance. It may be tempting to avoid dealing with the tax consequences for fear it will be burdensome or expensive, but it is better to take care of it voluntarily and get in compliance than to delay and let the consequences grow.
There are ways to get back into compliance that range from relatively easy to very difficult and costly. However, every process available to disclose foreign accounts and get current with reporting obligations goes more smoothly if the taxpayer initiates the process, as opposed to waiting for the IRS to discover the problem. The IRS is devoting much more energy and resources into discovering foreign accounts and is receiving much more cooperation from foreign financial institutions to disclose their formerly “secret” accounts.
The choice of voluntary disclosure is the best option. As an example, assume a taxpayer had a foreign account for the last six years—the initial balance was $20,000, the account earned $200 interest each year, but the taxpayer had not reported the earnings on his U.S. return nor filed the required annual informational returns to disclose the foreign account. Choosing voluntary disclosure, the taxpayer would owe the IRS approximately $1,100 in penalties. Absent voluntary disclosure, for non-willful violations the statutes authorize civil penalties of $10,000 per violation. In this case that could amount to $60,000 in penalties, and the penalties for willful nondisclosure could be much higher. Note that the civil penalties are in addition to severe criminal penalties that the government could enforce.
Voluntary disclosure occurs when you select one of the IRS available programs; cooperate with the IRS; and pay any tax, interest, and penalties that are applicable for the program selected. The IRS provides different voluntary disclosure options, including procedures for submitting delinquent informational returns, streamlined filing compliance procedures, and an offshore voluntary disclosure program.
Sciarabba Walker has helped taxpayers participate in the various voluntary disclosure programs, and we will give some examples in further installments of this blog series. If you have questions or find yourself in need of these types of services, please call to schedule an appointment.
Disclaimer: The information in this blog post is provided for general informational purposes only and is not intended to substitute for accounting, tax, or financial advice from a professional accountant. While we use reasonable efforts to furnish accurate and up-to-date information, we do not warrant that any information contained in or made available through this blog post is current or error free. No part of this communication is intended to be used for the purpose of avoiding penalties under U.S. federal tax law.