Friday is D-Day to voluntarily tell the IRS about your offshore assets

September 9, 2011

If your financial life spans multiple countries and you’ve not been paying close attention to your tax issues, be forewarned: This Friday is the deadline for the Internal Revenue Service’s latest offshore tax reporting voluntary disclosure program.

It’s one of those deadlines that most people pay little attention to, despite how much it’s been publicized. It’s the second in a series of IRS efforts — some 15,000 came forward for the previous initiative in 2009 — to bring offshore assets and income into the tax system through a voluntary disclosure program that let taxpayers avoid an array of civil and even criminal penalties (including potential jail time) for foreign income and account violations. Taxpayers who choose the program still face penalties, which may be hefty, but they are far less severe than those the IRS can impose if it uncovers your tax transgressions.

While you may think that this effort affects mainly uber-wealthy taxpayers with numbered accounts in Switzerland, the rules apply to a far broader, and more eclectic, group of people. Among those who could be affected are dual residents who haven’t filed returns, U.S. citizens (including retirees) who have been living abroad for decades, and immigrants in this country (whether citizens or not) who have maintained financial lives back home. “Some folks might not even realize they have a filing requirement,” says Jim Medeiros, a tax partner in PricewaterhouseCoopers private company services practice. “There are a lot of unintentional violators.”

Some taxpayers will find that complying with the program and paying the penalties aren’t too onerous given the risk it removes. But others may end up with huge unintended tax bills simply because they didn’t know the rules. The voluntary program’s penalty for failing to report foreign accounts on the FBAR, or foreign bank account reporting form is generally 25 percent of the highest aggregate balance in the account between 2003 and 2010. That’s a number that could be well over one-quarter of the current account’s value if its holdings were stocks valued at the peak, and it’s possible that the penalties due could exceed the amount of money now in the account. The FBAR filing is required for any U.S. person with at least $10,000 in a foreign financial account.

As immigrant communities learned of the rules, some were up in arms. A coalition of Indian American groups, for example, sent a letter of protest over the summer to Administration officials, arguing that the 25 percent penalty on law-abiding citizens was “immoral and unfair.”

The risks of not taking advantage of the program, however, are quite high. Should the IRS catch your non-disclosure, the penalties are severe, and could include criminal prosecution — and you don’t want to be the one the IRS makes an example of for not reporting. “You cannot claim ignorance,” Medeiros says.

The deadline for the program, officially called the 2011 Offshore Voluntary Disclosure Initiative, and begun in February, was extended because of Hurricane Irene, until today, Friday, September 9th. For those who are out of time, but still want to take advantage of voluntary disclosure, it is possible to apply for a 90-day extension.

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