If you read my previous post on FBARs, you know that if you have a foreign financial account with a value of $10,000 or more it is likely that you have a filing requirement for this account. And, if you failed to file the FBARs there are significant penalties associated with this mistake. The penalties range from $0 to $100,000+ (per year) and the possibility of criminal prosecution.
These penalties are significant and in some circumstances can exceed the value of the accounts. For example: John had three accounts valued at $250,000 (to make my life easier, we will assume this was not an interest bearing account) and failed to report them on the FBAR for six years. The statute of limitations for FBAR civil penalties is six years and five years for criminal charges. If John could prove that the failure to the FBAR was non-willful the penalties would range from 0 to $60,000. If the failure to file was willful the penalties would be $750,000 and possible criminal prosecution.
Earlier this year the IRS announced the 2011 Offshore Voluntary Disclosure Initiative (FBAR Amnesty, OVDI). The OVDI gives people a chance to come clean about these accounts to the IRS for a penalty, of course. The penalty is 25% of the highest aggregate value of your foreign accounts during any of the years covered, 2003-2010. If you have less than $75,000 during all of the years the penalty is 12.5%. A 5% penalty is available, but you probably won’t meet the requirements, so I won’t go into details. If you are accepted and complete the OVDI the IRS will not recommend criminal prosecution of your case to the Department of Justice and the willful non-disclosure penalties will not apply.
If you have properly reported all of the income associated with the foreign accounts but failed to file the FBAR the IRS states that it will not assess penalties. But, if there was any income associated with the accounts (even a few dollars) and you didn’t report it, you will not qualify for this exception. There are also a few exceptions listed that exclude certain types of accounts.
The 2011 OVDI borders on unjust. The requirements are inflexible and the majority of the people that will use this initiative are honest people that didn’t know they had to file until hearing about the program. The only people it truly benefits are the ones that have been hiding foreign income and assets. However, it is better than the alternative of getting caught for not reporting.
The final deadline for the OVDI is August 30th, 2011. Please note, this is the final deadline and it will take more than a few days to properly prepare all of the documents required for the OVDI.
If you are interested in participating in the OVDI, please contact a tax professional.
As with everything related to the IRS, it is difficult to provide comprehensive information related to taxes on the web. Please do not rely on this article without consulting your tax professional.