Effective July 1, 2014, the Internal Revenue Service has set up a streamlined program for getting foreign investment and bank accounts into full compliance with US income tax reporting laws.
Generally speaking a US taxpayer may have a US bank or investment account outside of the USA as long as they report their taxable income and disclose the account. Briefly, these are the requirements.
Reporting Taxable Income: First of all, if you are a US Citizen or US Green Card holder, for the rest of your life, no matter where you live you must file a personal income tax return (some low income people are exempt). If you are a US taxpayer for other reasons you also must file. (Form 1040 famously due April 15 of following year.)
Penalties for failure to report the income and pay the tax: Assuming no criminal fraud there is a a 3 year statute of limitations (unless the underpayment is very large and then a 6 year statute may apply). If the IRS catches you then you much pay the taxes, interest plus a negligence penalty, usually 20% added to both the taxes and the interest. – Most of us are familiar with these penalties.
Disclosing Your Interest in Foreign Accounts: In addition to reporting your taxable income you must file a completely separate form disclosing to the US Treasury via the IRS that you either own, have an interest, or have signature authority over a foreign account and these accounts all together come to $10,000 or more. – This is not an income tax form. It is merely a disclosure. (FBAR – Form 114, Foreign Bank Account Report, due June 30 of following year.)
Examples of Some Foreign Accounts that must be disclosed. The account your grandfather set up in Hong Kong in his name and your name together and never told you. The account your great aunt set up in Switzerland in her name payable on death to your children. – Your children must disclose the account. Your Canadian retirement account that built up while you were working there long ago. A life insurance policy issued outside of the USA that has cash value.
Other Disclosures: You must also disclose any gifts you received from non-US taxpayers (over $100,000), the fact you are the creator or beneficiary of a foreign trust, the fact that you may be a part owner of a foreign corporation that is owned 50% or more by 5 or fewer US taxpayers, and other holdings. There are several different forms used to make these disclosures. There are penalties associated with all these disclosures if not made.
Many US tax return preparers only focus on the Form 1040 and really don’t even think about or even know about the disclosure requirements. These are separate forms and are usually not included in the tax return preparation engagement.
Penalties for failure to disclose have nothing to do with failure to pay your income taxes. These are additional penalties. Until the Union Bank of Switzerland scandal that came to light in 2008 the IRS did not much focus on imposing the penalties that were on the book. But their first impression was that there was mass fraud and they started imposing massive penalties.
Summary of NEW Disclosure Program and Penalties as of July 1, 2014. After smashing mosquitos with sledge hammers for the last six years the IRS has come up with a program that matches the penalty more closely to the gravity of the failure to disclose. They have also come up with much easier procedures for people voluntarily get all their accounts property tuned up with US tax reporting and disclosure laws.
Let me put the alternatives now availabe into tiers. I hope this makes it easier to see where you or “your friend” might fit into the new program.
Now is the time to take action. You must be proactive. If you wait too long you may wind up in Tier Two. I have handled many cases in this area and I have found that if the taxpayer will be completely honest and fully report and pay the income taxes and fully disclose all foreign accounts that IRS is patient and cooperative. If the taxpayer chooses to be evasive or appears to disingenuous the cases do not go so well. The new Tier Four opportunity is a good time for people who are basically honest but have been confused or afraid to step up.
The Fine Print. This Tax Law Update is provided as an educational service by Hoge Fenton for clients and friends of the firm. This communiqué is an overview only, and should not be construed as legal advice or advice to take any specific action.
IRS Circular 230 Disclosure. IRS regulations generally provide that, for the purpose of avoiding federal tax penalties, a taxpayer may rely only on formal written advice meeting specific requirements. Any tax advice in this message (including any attachments) does not meet those requirements and is not intended or written to be used, and cannot be used, for the purpose of avoiding federal tax penalties or promoting, marketing or recommending to another party any transaction or matter addressed herein.