The IRS is experiencing increasing pressure to collect as much taxes as possible in light of a looming government deficit. One of the areas believed to contribute the most to the tax gap is the taxation of foreign incomes. Therefore, in the recent past, the IRS has increased its efforts to collect taxes from foreign incomes. The IRS is aggressively seeking disclosure of information from U.S citizens’ accounts in foreign financial institutions. The IRS has also made changes to the Foreign Bank Account Report (FBAR) disclosure and has also increased awareness for qualifying taxpayers to comply with the requirements of the FBAR.
Offshore Voluntary Disclosure Initiative (OVDI)
In 2009, the IRS introduced an amnesty program to enable taxpayers who had not made disclosures on the FBAR form in past years to come forward and comply with the rules of regulations. The Offshore Voluntary Disclosure Initiative (OVDI) of 2009 provided less penalties for individuals who had violated the rules of the foreign income disclosure and foreign income taxation. In 2011, the IRS had introduced yet another OVDI program in what they call “a last and final amnesty.” The FBAR form is a treasury form that is to be filed by every U.S. citizen, resident, or entity that owns or controls a foreign financial account that has had a balance equivalent to or over $10,000.00 at any point throughout the tax year. However, for those who missed out on filing the form in past financial years and who do not wish to be audited and face both civil and criminal charges, the IRS has set up the OVDI to compel such parties to come forward and report their foreign accounts with the incentive of facing far less punitive consequences. In this initiative, any taxpayer who has had a balance of over $75,000.000 or equivalent in their foreign account at any point since 2003 (to date) and has not complied with the FBAR can get back into the state of compliance by paying a penalty of 25% of the highest balance in which the account had within the same period. Those with foreign accounts whose balance remained below $75,000.00 or equivalent throughout the same period of 2003 to 2010, may pay a penalty of 12.5% of the highest balance in the account in the same period under the OVDI. For inheritance accounts and other qualifying accounts, the penalty for compiance under the OVDI is 5%. This may be a tax relief for many.
90 Day Extension
The deadline for the 2011 OVDI program was set to lapse on August 31, 2011. However, as a show of good faith and to ensure every taxpayer gets an opportunity to comply, the IRS has further extended the deadline of the OVDI by 90 days to November 30, 2011. However, one needs to apply for the extension and show cause for the need of this extension. The taxpayer will need to demonstrate that they indeed, attempted to meet the August deadline but may require the additional time to assess the taxes due and to ensure full compliance of the guidelines to the OVDI. The request must indicate the items that are still not disclosed and why they are not yet disclosed. The IRS has also placed further instructions on how to handle the extension in their website’s Frequently Asked Questions section.
The IRS has also provided an opportunity for taxpayers who signed in under the OVDI of both 2009 and 2011 to opt out of the initiative. The FAQ section of the IRS has also been updated to include details about how one can opt out of the programs and reasons why someone may opt out. Ideally, taxpayers can opt out of the program if the penalties to be paid through the OVDI are more than what they will owe if they are audited and will have to pay the due taxes, interest, and penalties. One of the examples given for someone seeking to opt out is, if the taxpayer qualified for foreign income credits that cover the taxes that were due over the years and so, they owe no taxes and will only owe penalties for not filing the FBAR form (which may be significantly less than the OVDI penalties). However, the IRS warns that if one opts out of the OVDI, they may face criminal charges, especially if not filing the FBAR form in past tax years is proven to be frivolous or to avoid taxes.