Magazine article The CPA Journal

Foreign Bank Accounts

Magazine article The CPA Journal

Foreign Bank Accounts

Article excerpt

The recent dissolution of Wegelin & Co., the oldest private Swiss bank, and the charge to profits taken by Bank Leumi, an Israeli bank, highlights the pressure being exerted on foreign banks and U.S. taxpayers. Resident taxpayers and U.S. citizens living abroad must report and pay taxes on all of their worldwide income. All U.S. citizens and resident taxpayers must also file a Report of Foreign Bank and Financial Accounts (FBAR), with respect to their "financial interesf ' in, or any signature or other authority over, a "foreign financial account" once the aggregate value of the taxpayer's foreign accounts exceeds $10,000 [see Internal Revenue Manual (IRM) 4.26.16, Report of Foreign Bank and Financial Accounts, at 4.26.16.3.1.1 and 4.26.16.3.4 (2008), also known as the FBAR Manual]. Substantial penalties apply for those who fail to report the existence of foreign accounts. Awareness of the reporting requirement is increasing, but many taxpayers still do not comply.

To encourage taxpayer compliance, the 1RS has offered its Offshore Voluntary Disclosure Program (OVDP). A taxpayer who complies with the OVDP is generally free from criminal liability. In exchange, the taxpayer must file amended returns, pay back taxes with penalties (at 20% of the resulting tax), and pay an additional penalty for failing to report the account in prior years. [Under the original OVDP, there were three penalty levels for the failure to report: 5% (of the principal balance in the account) for those taxpayers who did not open or actively manage the account, never withdrew more than $1,000 from the account in a single year, and can establish that the funds deposited into the account did not escape U.S. taxation; 12.5% penalty for those taxpayers whose accounts never exceeded $75,000; and 27.5% for everyone else. See the IRS's OVDP Frequently Asked Questions and Answers (FAQ), answer to question 7, http:// www. irs .go v/Indi viduals/IntemationalTaxpayers/Offshore-Voluntary-DisclosureProgram-Frequently-Asked-Questions-andAnswers. If all income was reported and the only omission was a failure to file the FBARs, penalties may be avoided.]

A common criticism of the penalty structure is that taxpayers are placed in the same category, irrespective of their intent. A taxpayer who purposefully deposited funds into a foreign bank account with the goal of evading U.S. taxes faces the same 27.5% penalty as an immigrant who innocently maintained an account in her homeland.

Example

Mr. and Mrs. X are immigrants who lawfully came to to the United States and became citizens in the 1980s. Throughout their residence in the United States, Mr. and Mrs. X worked in relatively low-paying jobs. Neither has a college education.

Mr. X receives a disability pension equivalent to $10,000 per year from his native country, deposited directly into a bank account located there. Mrs. X inherited funds from her mother, a nonresident who remained in their homeland, and retained those funds in another offshore account. Some funds are occasionally transferred into a separate savings account to generate interest. Aside from withdrawals used as spending money during trips to their homeland, no other disbursements are made. Income tax was paid in their native country on the interest from those accounts, and the highest aggregate balance was $300,000.

Mr. and Mrs. X have always relied on a CPA to prepare their U.S. tax returns but were not aware that the overseas income had to be reported, nor were they aware of the FBAR requirements. In 2012, they hired a new accountant who, after learning of the foreign accounts, advised the couple to consult an attorney.

Mr. and Mrs. X entered the OVDP to avoid any criminal penalties resulting from their failure to report foreign accounts. For 2004-2011, the Xs have a modest tax liability of approximately $2,000. This amount will be paid with interest and an additional 20% accuracy-related penalty. With the FBAR filing penalty of $82,500 at the 27. …

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