Caplin & Drysdale, Chartered - International Tax Alert
Recent Developments Relating to FBARs and Offshore Voluntary Disclosure Program
By Lucy S. Lee and Scott D. Michel
Last week was a busy week for the IRS. The IRS has made several important announcements regarding the terms and deadlines for filing the Form TD F 90.22-1 (the so-called "FBAR"), and participating in the special offshore voluntary disclosure programs for offshore accounts.
1. Extension of Time for Certain Filers of Form TD 90-22.1: The due date for filing the Form TD F 90-22.1 for employees and officers of certain entities who only have signature or other authority (but no financial interest) over the reportable account has been extended to June 30, 2012. This extension applies only to employees or officers of entities described in 31 CFR § 1010.350(f)(2)(i)-(v), which generally include certain banks, certain financial institutions, SEC-registered Authorized Service Providers, entities with equity securities (or ADRs) listed on a U.S. national securities exchange, and entities with equity securities (or ADRs) registered under section 12(g) of the Securities Exchange Act. For all other individuals with an FBAR filing obligation, the deadline remains June 30, 2011.
2. Extension of Time for the 2011 "Offshore Voluntary Disclosure Initiative" ("2011 OVDI"): On February 8, 2011, the IRS announced a second voluntary disclosure program targeted at U.S. taxpayers with undisclosed offshore assets. Pursuant to the terms of the program then-announced, taxpayers were required to submit all required materials and full payments of taxes, interest and penalties (including a miscellaneous penalty for the failure to file FBARs) by August 31, 2011. The IRS has now provided a 90-day deadline extension for taxpayers who have made a good faith attempt to fully comply with the provisions of the 2011 OVDI by August 31, but are unable to submit a complete package. To obtain an extension, the taxpayer must make a written request that meets the specific requirements set forth in the guidance, including a statement of those items that are missing, the reasons why they are not included, and the steps taken to secure them.
3. Revised Set of "Frequently Asked Questions" ("FAQs"): The IRS has issued revised FAQs, further explaining and modifying the terms of the 2011 OVDI, as well as providing a new penalty option for participants in the 2009 "Offshore Voluntary Disclosure Program" ("2009 OVDP").
The revised set of FAQs generally confirms that a taxpayer participating in the 2011 OVDI must file amended returns and FBARs for years 2003 through 2009 (2010 must also be file correctly). It also confirms that the penalty for failing to file FBARs for the prior years will be a one-time penalty of 25% of the amount in the offshore bank accounts in the year with the highest aggregate account balance covering the 2003 to 2010 time period. The revised FAQs also confirm that non-financial assets, such as real estate, art, jewelry or other items, also can be included in the calculation of the 25% penalty if those assets have any connection or relationship to the prior tax non-compliance.-e.g., if they were purchased with funds from undeclared accounts, or if the income from the assets was not reported.
However, the revised FAQs provide that the offshore penalty will not be imposed on non-financial assets of certain individuals who qualify for the reduced 5% penalty, as further described below.
The new FAQs retain the 5% safe harbor for taxpayers who had specified minimal contacts with their foreign accounts or were unaware that they were U.S. citizens. These provisions had been issued with the original program guidance in February 2011. However, there is now a third opportunity for participants in the OVDI to obtain a reduced penalty, and in some cases, a substantially reduced penalty.
Pursuant to the revised FAQs, individuals can now qualify for the reduced penalty of 5% if the individual is (a) a resident in a foreign country, (b) can demonstrate that he or she has timely complied with all tax reporting and payment requirements in the country of residency; and, (c) has $10,000 or less of U.S. source income each year. For an individual qualifying under this criteria, the offshore penalty will not be imposed on non-financial assets, provided that the income tax returns filed with the foreign tax authority included the offshore-related taxable income that was not reported on the U.S. tax return.
This new provision is retroactive. Taxpayers who participated in the 2009 OVDP and paid the 20% offshore penalty can also be considered for the reduced penalty of 5% by submitting a statement establishing the basis for the reduced penalty, along with a copy of the closing agreement.
4. Defined "Opt Out" Process: The IRS has also announced the guidelines regarding the procedure for a taxpayer to "opt out" or be removed from the 2009 and 2011 offshore voluntary disclosure programs. In the announcement, the IRS notes, "It should be recognized that in a given case, the opt out may reflect a preferred approach." That is, there may be instances in which the results under the applicable voluntary disclosure program appear too severe given the facts of the case." The revised FAQs contain a number of examples, instances where the IRS notes it might be "beneficial" for the OVDI participant to consider an opt out, and cases where it might be disadvantageous for the taxpayer to do so. Generally, the former examples are cases where it appears plainly that the taxpayer did not willfully try to cheat the U.S. government out of tax revenue, or to fail to file required information returns, and the latter examples are cases where the taxpayer's willful misconduct is somewhat obvious. Of course, the decision to opt out of the OVDI's guaranteed penalty cap is an important one, and participants should consult with their tax advisors and review the facts of their matter in great detail before choosing to opt out.
The new guidance was accompanied by a set of procedures governing IRS personnel in processing "opt out" cases. Those procedures note that OVDI participants should not be penalized or rewarded for choosing to opt out. Generally, the new procedures require IRS personnel to engage in a threshold examination of the taxpayer's willfulness as it relates to potentially applicable penalties before assigning the case for a full examination or other treatment.
For questions, please contact:
Lucy Lee 202-862-8863 firstname.lastname@example.org
Scott D. Michel 202-862-5030 email@example.com
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