Which Door is Closing for Taxpayers with Foreign Financial Assets
On Sept. 28, 2018, the IRS will be closing its 2014 Offshore Voluntary Disclosure Program (OVDP), a program that assists taxpayers who failed to disclose foreign financial assets and to pay all tax on any income related to such assets. To patriciate in the program before it closes, taxpayers must submit the required disclosures and materials postmarked no later than Sept. 28, 2018.
U.S. taxpayers are required to report and pay tax on their worldwide income, including income from foreign assets. To help the government identify foreign assets and collect tax on any income generated by those assets, U.S. taxpayers with foreign financial assets are generally required to disclose such assets on their tax returns and to file a Foreign Bank and Financial Accounts Report (FBAR).
In particular, taxpayers who have more than $10,000 in accounts with foreign financial institutions on any day during the year are required to report that information to the U.S. Treasury by June 30 of each year by filing a FBAR. The FBAR is a separate report that has to be filed in addition to a tax return, which lets the government know of the existence of one or more foreign financial accounts.
Individuals who open up bank accounts in foreign countries for reasons that do not involve tax evasion – because they were temporarily living there, have second homes in the foreign country and want easier access to cash, or are studying or working abroad – are still subject to FBAR filings. Individuals who are dual citizens of the United States and a foreign country are required to file FBARs if they have one or more foreign bank accounts that have more than $10,000 even if they permanently live and work in the foreign country with no bank accounts in the United States and owe no U.S. income tax.
The OVDP has been in existence in one form or another since 2009. The OVDP offered a reprieve from the harsh penalties, including jail time, for such filing failures. From 2009 through May of 2014, 45,000 taxpayers filed for relief through the OVDP, netting the government about $6.5 billion in back taxes, interest and penalties.
The OVDP, though, has been only one option available to U.S. taxpayers who had failed to file FBARs but who wanted to come into compliance with both the FBAR filings and paying income tax on income earned outside the United States. After the OVDP was opened the IRS determined that many taxpayers established foreign bank accounts for reasons other than evading U.S. income taxes. For those taxpayers, the IRS offered two other programs, the Streamlined Filing Compliance Procedures (SFCP) and the Delinquent FBAR Submission Procedures.
The Delinquent FBAR Submission Procedure may be used by taxpayers who have reported their income earned in foreign accounts but failed to file the required FBAR. The SFCP is available to taxpayers who failed to file their FBARs and to report the income earned on their foreign financial accounts on their U.S. income tax returns due to negligence, inadvertence or mistake or conduct that was the result of a good faith misunderstanding of the requirements of the law.
The Delinquent FBAR Submission Procedure and the SFCP will remain available to taxpayers after the OVDP closes on Sept. 28, 2018. There is no guarantee, though, that the SFCP will remain open forever; and the IRS is encouraging those taxpayers who have offshore compliance issues and meet all of the qualifications of the SFCP to use that procedure while it is still available.
For taxpayers who have offshore tax compliance issues and who may have opened foreign financial accounts with the intent to evade U.S. income tax, they may want to consult with their tax advisors while there is still time to come clean, pay the tax, and avoid jail time before the OVDP door closes.
This article was reprinted with permission from Albuquerque Business First.
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