Mr. and Mrs. Doe, who are U.S. citizens, have an account with a foreign financial institution. The Does have never reported their ownership of or the income from this account on Schedule B of their U.S. federal income tax returns, and they have never filed Treasury Form TD F 90-22.1 (Report of Foreign Bank and Financial Accounts or FBAR), which they are required to do to disclose this account.
The Does are aware of the U.S. government's intense focus on detecting unreported foreign financial accounts, and are concerned about their criminal and civil exposure. What can they do to mitigate their exposure, and what does this coming Wednesday, September 23, mean for them?
That's the deadline for taxpayers to voluntarily disclose these accounts and avoid criminal prosecution, assuming certain other conditions are met. The IRS's policy is generally not to recommend criminal prosecution for taxpayers who make a qualifying voluntary disclosure.
For the Does' disclosure to qualify as voluntary, it must be "timely," which generally means it must be made before the IRS receives information about the Does' noncompliance or audits the couple. The Does' disclosure also must be truthful and complete, they must cooperate with the IRS in determining their correct tax liability and make arrangements in good faith to fully pay it, and their unreported assets or income may not be from illegal sources.
If the IRS finds out this account exists before the Does voluntarily come forward, the Does may face criminal prosecution. For example, a person who makes a false statement on a tax return could be sentenced to a prison term of up to three years, and one who willfully fails to file an FBAR could be sentenced to five years. Although UBS account holders (including those individuals who have recently entered guilty pleas) have received a lot of attention, high-level IRS officials have indicated that the government also will aggressively go after noncompliant U.S. clients with accounts at other financial institutions, both in Switzerland and elsewhere.
In addition to prison time, the Does could face significant civil penalties. For example, the Does may be subject to a civil fraud penalty of 75% of the taxes they did not pay. The Does may also be subject to a civil penalty for willfully failing to file FBARs equal to 50% of the balance of the account per year. There is no "ceiling" on this penalty, so it could potentially wipe out the Does' foreign account and then deplete their domestic assets.
Can the Does minimize civil penalties? Possibly, if the voluntary disclosure is made before September 23. Last March 23, the IRS established a six-month program, which some have referred to as a "partial amnesty," that provides for significantly reduced civil penalties.
Under this program, which is set to expire Wednesday, the Does must pay tax and interest on the account's unreported income for the last six years, penalties equal to 20% of the tax due for each of the six years, and one 20% FBAR penalty applied to the highest balance in the account during the last six years. With potential civil fraud penalties equal to 75% of the unpaid taxes and FBAR penalties of up to 50% of the amount in the account for each of the years of noncompliance, the current penalty reduction program offers significant benefits to the Does.
If the Does don't voluntarily disclose by Wednesday, penalties against them may not be reduced-or not as generously.
Seth J. Entin is an attorney based in Miami with the law firm Greenberg Trauig. Entin concentrates his practice on federal income taxation, with an emphasis on international taxation.