Thursday, January 19, 2012

Bellevue Tax Lawyer | The 2012 OVDI, FBAR Amnesty

The IRS has announced the reopening of the OVDI program.  The terms of the program are basically the same as the 2011 program with few key exceptions.  First, the penalty rate for the 2012 program is 27.5% instead of 25%.  The 12.5% and 5% rates are still available if the taxpayer meets the requirements for theses rates.  Second, the program does not have an end date and the IRS can close the initiative at any time.  Third, the IRS can change the penalty rate at any time.

The remaining terms of the new program are the same as the 2011 OVDI as discussed in the link post and summarized below:
  • The penalty is based on the highest aggregate balance for any year in the previous eight year period;
  • The penalty includes the value of any land purchased with non-compliant funds, or that has produced unreported income;
  • The taxpayer has to file new or amended FBARs for all years in question;
  • The taxpayer must file or amend tax returns for all years in question pay interest on the liability and pay a 20% penalty on the tax liability for the previous eight years;
  • Foreign trusts and other entities are included in the initiative.
Taxpayers with reportable foreign accounts that have not entered a program should consider what to do now.  As the IRS continues to increase their efforts to obtain the names of foreign account holders, through agreements or settlements with the banks, the risk of discovery increases.  This program is an opportunity for people the avoid some of the harsh penalties that can result from a regular audit and for the taxpayer to get into and remain in compliance.

If you have any questions please contact me directly or leave a comment.

As with everything related to the IRS, it is difficult to provide comprehensive information related to taxes and tax law on the web.  Please do not rely on this article without consulting a tax professional.

11 comments:

  1. Hi Aaron, I have 2 question:

    1. Could you please explain what non-compliant funds means? Let us say I have a bank account in India that I did not report interest income on and did not file FBAR. If I transfer after-tax dollars from the US to that bank account and the amount is sitting in that bank account and later on, I use that money to buy land in India, is that considered land bought from "non-compliant funds"?

    In this example, it is very clear that the total of after tax dollars (balance in the bank account) is much higher than the unreported interest income.

    2. Let us say I have a bank account in India that I did not report interest income on and did not file FBAR. If I transfer after-tax dollars (say $100,000) from the US to that bank account and the amount is sitting in that bank account and later on, I transfer that money to another deposit account in the same year. So, I have 2 accounts. Each will have a maximum balance of $100,000. So, will the penatly be on $100,000 or $200,000?

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  2. To answer your questions:

    1) Noncompliant funds means any income that was not properly reported and/or taxed. Thus, if you deposited the money in a foreign bank and it earned interest, the unreported interest is noncompliant funds. If interest was not paid on the funds, there isn't noncompliance, and the land would not be included in the penalty calculation. If interest was paid, the value of the land will be included (at least partially) in the penalty calculation. If the land produces income (rents, royalties, etc...) that was not reported, then the entire value of the land is included in the penalty.

    2) The penalty is only on the $100,000. For the program, this is called duplication and the duplicated funds are omitted from the penalty calculation. Duplication occurs when you transfer the same funds from one bank account to another within the same calendar year.

    For example, lets say on January 10, 2005 you open a foreign account with $100,000. In September 2005 you transfer the $100,000 to another account. For the FBAR you have two separately listed accounts each with $100k maximum value which would each be reported that way on the FBAR. However, because the $100k is the same money, the penalty is calculated using the $100k once.

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    1. Thanks for the prompt response. #2 makes sense.I assume the same applies if the $100k is tranfered from a bank acount to another account type (say deposit account or a bond or a debenture).

      A follow-up question on #1:I am a little confused why the duplication rule does not apply to land also? If I have $100k in a bank account and use it to buy land worth $100k, then when calculating maximum balance, it should be only $100k, right?

      Also, when you say "partially included", how is that number calculated. For example, if interest paid on the bank account is 5%, will 5% of land value be used?

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    2. If you give me a call tomorrow, I'd be happy to discuss this issue with you. I try not to post anything that could be interpreted as legal analysis and this is getting very close to that line.

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  3. Help please!

    I set up an account in europe with $75,000 in 2009. It earned no interest in 2009. We did not file that TDF90 22.1 as we had no interest. It turns out we had to have filed that form by June 2010 for tax year 2009.

    that account earned $400 in interest income.

    I filed an extension of time for 2010 tax return and we owe no money. I'm preparing that return now and notice the question on schedule B asking if we own a foreign bank account.

    so now I have a quick question.

    if I file a late TDF 90 22.1 for tax year 2009 (no interest income whatsoever) and the balance in the account was $75,000, how much is the penalty???

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  4. Assume that someone has 3 Taiwan bank accounts, but he failed to file 1040 or FBAR reports since 2006, will a one-time 27.50% penalty on the highest values of accounts be all the penalty ? Or would there still be USD 10000 per year per account penalty on all the 3 accounts ?

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  5. If you go through the program a one time penalty of 27.5% of the highest aggregate account balance will be assessed. Additionally, you have to pay the taxes and interest on the income earned on the bank accounts plus a penalty of 20% of the unpaid taxes.

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  6. I am a US citizen who has lived and worked in India for about 5 years. I was told by HR Block that I did not have to file US Income Tax Returns because I earn less than the allowable limit ($80k-$90K), live in India, and pay Indian income tax. I now find out HR Block was wrong, so I have 4 years of returns to file. I also just found out about FuBAR. Is ignorance of the law considered a good reason not to have filed? Is the penalty based on the amount of US income tax due (which is negligible) or on the total savings in my accounts here in India? Are they going to take my life savings just because I did not know about this law?

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    1. This comment has been removed by the author.

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    2. Thanks for the comment. The IRS has started a new program for US residents living abroad. I have a post about it: http://www.richtertaxblog.com/2012/06/bellevue-tax-lawyer-2012-ovdp-fbar.html. It sounds like the new program might apply to you. If you have any questions, send me an email or we can schedule a phone call.

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