IRS makes it less risky for U.S. residents to start reporting foreign accounts.

June 19th, 2014 by Joe Kristan

The IRS has announced updated procedures for taxpayers to file overdue FBAR foreign account disclosures.  These reports are required of taxpayers who have foreign accounts with balances that exceed $10,000 at any time during the year.  Penalties can reach 50% of the highest account balance per year of willful violations.

The new rules provide a streamlined procedure for U.S. residents to begin reporting FBAR non-filing.  The procedure had been available only to non-residents.  It also has eliminated the inane $1,500 cap on unreported taxes from foreign accounts.  Tax Analysts reports ($link):

     In addition to permitting resident U.S. taxpayers to use the streamlined program, the IRS has also eliminated the $1,500 tax threshold and the risk questionnaire. Taxpayers must certify that previous compliance failures were not willful.

Under the revised program, all penalties will be waived for nonresident U.S. taxpayers and resident taxpayers will be subject only to a miscellaneous offshore penalty equal to 5 percent of the foreign financial assets that gave rise to the tax compliance issue.

[Attorney Caroline] Ciraolo said practitioners will be pleased that the streamlined program will now be available to residents that previously did not qualify because they were living in the U.S. at the time they initially attempted disclosure. 

This liberalization is combined with higher penalties in some cases.

This looks like a positive development, though I still think it should be more liberal.  A no-questions asked policy for taxpayers with liabilities under a reasonable threshold, with only interest charged on late taxes, would be even better — especially given the extra penalties on those who come in only when it is clear their banks are going to turn over their names anyway.  There are requirements for submitting back foreign account statements, which may not be available.

The IRS doesn’t appear to be applying the relief retroactively, so taxpayers who have already come in voluntarily and paid ridiculous penalties are played for chumps.  And the real problem — worldwide taxation under the U.S. tax system — remains.  A Wall Street Journal report sums it up:

One potential drawback: Taxpayers who come forward in the future may end up faring better than those who heard about the U.S. campaign in the past and presented their case to the IRS then. For example, experts said, taxpayers from the latter group who owed more than $1,500 in taxes could have paid a penalty as high as 27.5%.

In addition, taxpayers abroad face the risk of double taxation, said John Richardson, a Toronto lawyer who works with U.S. taxpayers living in Canada. “The problem is that, penalties aside, the U.S. tax laws are very punitive for U.S. citizens abroad,” he said.

Links:

Commissioner Koskinen news release

IRS news release, IRS Makes Changes to Offshore Programs; Revisions Ease Burden and Help More Taxpayers Come into Compliance 

Streamlined offshore resident procedures

Streamlined U.S. resident procedures

Jack Townsend has a summary and more useful links to the updated IRS procedures.

Accounting Today has a useful article with an oxymoronic headline, IRS Eases Offshore Voluntary Disclosure Program for Non-willful Tax Evasion.  If it’s not willful, it’s not evasion.

And remember, the FBAR report for 2013 accounts on Form 114 is due June 30.

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