Shooting the Jaywalkers: The IRS is Looking For Offshore Accounts

By: William J. Killory, CPA (May, 2011)

The Internal Revenue Service is in the midst of an initiative designed to bring offshore money back into the American tax system. The Swiss bank account has lost its luster for secrecy with settlements with UBS almost two years ago. Any taxpayer that has foreign accounts that exceeds $10,000 in the aggregate at any time during the year must file Form TD F 90-22.1 Report of Foreign Bank and Financial Accounts (FBAR) by June 30 of the following year. Failure to properly file the FBAR is subject to a civil penalty up to $10,000. Willful failure to file the FBAR can subject the taxpayer to a penalty equal to the greater of $100,000 or 50% of the balance in the account at the time of the violation. Willful violations are also subject to criminal penalties. Failure to file the report for multiple years will subject the taxpayer to multiple penalties.

The current initiative is spearheaded by the Financial Crimes Enforcement Network, a bureau within the Treasury Department. These are the folks that go after money launderers and tax evaders. The FBAR emanates out of bank secrecy legislation designed to uncover this type of activity. Unfortunately the net is cast so widely that taxpayers with no intention of evading tax or hiding assets are swept up into this enforcement regime and are subject to these penalties. Americans living overseas that have foreign accounts are subject to this even if any income derived from the account would not be taxed due to credits or exclusions. Americans that may inherit money from foreign relatives may be subject to this reporting as well. The draconian penalties that can result from seemingly innocent foot faults have been referred to by those following this initiative as "shooting the jaywalkers".

Who must report

Anyone with a financial interest or signatory authority over foreign financial accounts that, in the aggregate, exceed $10,000 at any time during the year must file the FBAR. According to the Internal Revenue Service, a financial account includes, but is not limited to, securities, brokerage, savings, demand, checking, depositor or other accounts maintained at a financial institution. Financial accounts also include commodity futures or option accounts, insurance policies with cash value, annuities with cash value and shares in a mutual fund or similar pooled funds.

A foreign account is one that is located outside the United States, even if it is a branch of an American bank. An account in an American branch of a foreign bank is not a foreign financial account. A foreign interest encompasses direct ownership as well as beneficial ownership through trusts, controlling interests in partnerships and corporations. Signatory authority is anyone with the ability to control the disposition of assets held in a foreign financial account either directly or in conjunction with another individual.

Offshore Voluntary Disclosure Initiative

If you have not been previously identified by the Internal Revenue Service you have until August 31, 2011 to come clean. You must submit copies of originally filed income tax returns and amended returns from 2003 onward. The amended returns must include a schedule of previously unreported income detailing the source and nature of the income. The taxpayer will be subject to all the ordinary penalty provisions including the 20% accuracy penalty, failure to file and failure to pay penalties where applicable. In lieu of FBAR penalties taxpayers qualifying under this initiative will be subject to penalties on the foreign accounts ranging from 5% to 25% of the highest aggregate balance covered under the period of the voluntary disclosure.

The initiative requires disclosure of all foreign assets beyond the definitions set out for FBAR reporting. This includes real estate and shares in companies and other investments. The IRS may include the value of these assets when calculating the penalty if they reasonably believe that these assets were purchased by the foreign accounts or are the source of the foreign accounts.

If you believe you may have reportable foreign accounts please contact us at once. The first deadline is June 30 for filing related to 2010. The second deadline is August 31 to complete the past due reports. The voluntary disclosure program is a rather involved process and requires pre-filing clearance from the IRS before you can even proceed. Because of the potential for criminal penalties we will likely advise you to retain an attorney to go through this process.

The days of the secret Swiss account are over and the IRS is determined to shine American taxing sunlight on those offshore Cayman accounts. The penalty provisions are so severe that anyone with unreported offshore activity risks losing much more than what is in the account along with facing criminal penalties.


The information reflected in this article was current at the time of publication. This information will not be modified or updated for any subsequent tax law changes, if any.

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