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IRS Attacks Undisclosed Foreign Accounts and Investments

The Internal Revenue Service is increasing its scrutiny of taxpayers who have or control foreign financial accounts, including bank accounts and investment accounts, or who have failed to disclose interests in foreign corporations, partnerships, gifts, trusts, or estates. President Obama has publicly expressed concern about noncompliance in this area and the IRS has emphasized that it will rapidly ramp up enforcement efforts against taxpayers who violate these requirements.

Under IRS rules, a U.S. person (defined as a citizen or resident of the United States, or a domestic corporation, partnership, estate or trust) having a financial interest in or signature authority over one or more financial accounts located in a foreign country which have an aggregate value exceeding $10,000 at any time during a calendar year is required to inform the IRS of this fact by filing an annual information return.  Of course, all interest, dividends, and capital gains arising from each account must also be reported on the owner’s or beneficiary’s income tax return for the year in which that income arose.

Taxpayers who fail to properly disclose the existence of foreign investments to the IRS or report the income arising from a foreign investment risk significant civil and criminal penalties. For example, the Internal Revenue Code authorizes the IRS to impose a civil penalty equal to the greater of $100,000 or 50% of the balance in the foreign account for each year in which the account is not properly disclosed.  In addition, taxpayers convicted of willfully failing to properly disclose the foreign account face prison terms of up to ten years and criminal penalties of up to $500,000.  The IRS can also impose additional civil and criminal penalties for failing to report the income arising from the foreign account. In addition, the Internal Revenue Code has information reporting requirements for taxpayers owning interests in foreign corporations or partnerships, who receive gifts from non-U.S. persons, or who are beneficiaries of foreign trusts or estates.  The penalties for failing to file the required information returns in these circumstances are as confiscatory as those for foreign accounts.  Criminal penalties can also apply for willful failures to file these returns.

In an effort to convince taxpayers to voluntarily comply with the rules governing the ownership of foreign accounts and other assets which have not previously been disclosed, the IRS is offering an “amnesty” program which runs through September 23, 2009 for taxpayers who choose to admit prior acts of non-reporting.  The amnesty program offers reduced civil penalties and a waiver of criminal prosecution for taxpayers who take advantage of it.  The IRS has also announced that, after the amnesty program ends, criminal prosecutions of noncompliant taxpayers will increase dramatically, and the IRS has further announced plans to hire several hundred additional attorneys and investigators over the several months to assist it, in part, with these investigations.

The amnesty program is not without cost.  Taxpayers with unreported income must file amended returns for the last six years, pay the resulting tax liability, and also file any information returns which are unfiled.  Significant penalties will also be assessed, as well as interest on the tax liability and penalties.
However, in most cases these penalties are far less than what the IRS could otherwise assess if the non-reporting is discovered.  Criminal penalties should also be avoided.

If anyone you know has control over a foreign financial account, owns an interest in a foreign corporation or partnership, or is a recipient of a gift from a non-U.S. person or the beneficiary of a foreign estate or trust, I strongly encourage you to pass the above information along to that person.  I am happy to answer any questions which may arise regarding the amnesty program.