The Treasury Department and Internal Revenue Service (together, Treasury) have recently provided U.S. taxpayers additional guidance regarding the terms and deadlines for filing the Form TD 90.22-1 (FBAR) and for participating in the 2011 Offshore Voluntary Disclosure Initiative (OVDI).
- FBAR Filing Deadline Extended for Certain Persons. In Notice 2011-54, Treasury extended the FBAR filing deadline for persons having signature authority over, but no financial interest in, a foreign financial account. Such persons now have until November 1, 2011 to report their signature authority over such accounts in 2009 and earlier years. The deadline for reporting signature authority over, or a financial interest in, foreign financial accounts for the 2010 calendar year remains June 30, 2011. Treasury extended the deadline in recognition of the difficulty that such individuals were having compiling the information needed to file complete and accurate FBARs with respect to 2009 and earlier calendar years by the June 30, 2011 deadline (as previously extended by Notice 2009-62 or Notice 2010-23).
- OVDI Filing Deadline Extended In Certain Circumstances. As noted in our earlier client alert, the 2011 OVDI provides an opportunity for taxpayers to voluntarily disclose previously undisclosed foreign financial accounts, thereby likely avoiding criminal prosecution and significantly reducing otherwise applicable civil penalties. Pursuant to the terms of the 2011 OVDI, in order to qualify under the program, taxpayers are required to submit a complete package, including all amended tax returns, FBARs, information returns, full payment of taxes, interest and applicable penalties by August 31, 2011.
In recognition of the difficulty that some taxpayers are having compiling the information necessary to comply with this deadline, Treasury now provides that a taxpayer may request an extension of up to 90 days to complete his submission if he can demonstrate a good faith attempt to fully comply with the requirement to make a complete submission by August 31, 2011. A good faith attempt to fully comply must include (1) the properly completed and signed agreements to extend the period of time to assess tax (including tax penalties) and to assess applicable penalties; and (2) a statement of those items that are missing, the reason why they are not included, and the steps taken to secure them.
- Opting Out of 2011 OVDI. Treasury has recently acknowledged that “opting out” of the civil settlement structure of the 2011 OVDI may be the preferred approach for certain taxpayers that would face significantly higher civil penalties under the 2011 OVDI “one-size fits all” program than outside of the program. For example, if a taxpayer were to report his previously undisclosed foreign financial accounts under the IRS Criminal Investigation’s long-standing Voluntary Disclosure program (i.e., outside the 2011 OVDI program), the taxpayer would be permitted to assert “reasonable cause” and other defenses to potential civil penalties that may be imposed. Inside the 2011 OVDI, however, in lieu of all other penalties that may apply, the taxpayer must pay a penalty equal to 25% (or in limited cases, 12.5% or 5%) of the highest aggregate balance held in the account during the years covered by the voluntary disclosure (FBAR Penalty) – without regard to whether the taxpayer’s violation was non-willful or due to reasonable cause.
We note, however, that even if a taxpayer makes a submission under and later opts out of the 2011 OVDI, they will remain within the IRS Criminal Investigation’s Voluntary Disclosure Practice – which will require that they cooperate fully, provide all requested information and records, and pay all tax, interest and penalties they are ultimately determined to owe. This modification to the terms of the 2011 OVDI indicates a recognition by Treasury that the consequences under the 2011 OVDI may be unduly severe for certain taxpayers.
- New Reduced 5% FBAR Penalty for Certain Citizens and Green-Card Holders Living Outside of the U.S. Treasury has added a new category of taxpayers who may qualify for the reduced 5% FBAR Penalty under the 2011 OVDI (in lieu of the 25% FBAR Penalty that would otherwise apply).
The reduced 5% FBAR Penalty will apply to taxpayers who are foreign residents and meet all three of the following conditions for all of the years covered by their voluntary disclosure: (1) the taxpayer resided in the foreign country; (2) the taxpayer makes a good faith showing that he has timely complied with all tax reporting and payment requirements in the country of residency; and (3) taxpayer has $10,000 or less of U.S. source income each year. Importantly, for these taxpayers, the penalty base for computing the 5% FBAR Penalty will not include non-financial assets, such as real property, business interests or artworks, if they were purchased with funds for which the taxpayer can establish that all applicable taxes have been paid, either in the U.S. or in the country of residence.
This new reduced penalty provision could be very beneficial to dual citizens and U.S. persons who live abroad and have complied with the tax laws of the country in which they reside. In addition, taxpayers who participated in the 2009 Offshore Voluntary Disclosure Program are also eligible for this new reduced 5% penalty regime if they meet the requirements (even if they have already entered a closing agreement under the prior program).
We have assisted numerous individuals and companies in complying with their FBAR obligations and the tax and information reporting requirements associated therewith. Please do not hesitate to contact any of us or any member of the McGuireWoods Tax Controversy Team if you would like additional information on your options for reporting a previously undisclosed foreign financial account.