by Greg Hudgins

All U.S. persons (individuals and all forms of business entities, trusts and estates) who are citizens or residents of the U.S. or are living in or doing business in the U.S., are required to report any income realized in foreign accounts. Additionally, a U.S. person is required to file an annual Foreign Bank Account Report (FBAR) with the IRS if the U.S. person has a financial interest or signatory authority over a foreign account or accounts with an aggregate value exceeding $10,000 during the calendar year regardless of realized income.

The IRS has recently developed a voluntary disclosure program to facilitate compliance with regulations pertaining to the reporting of foreign financial accounts and taxation of income earned in foreign accounts. In a March 26, 2009 statement from IRS Commissioner Doug Shulman, he explained his goals are “to get those taxpayers hiding assets offshore back into the system” and “to have a predictable set of outcomes to encourage people to come forward and take advantage of our voluntary disclosure practice”. Under the program, a taxpayer disclosing previously unreported foreign income will need to file or amend all returns going back six years, pay back taxes and interest, pay either an accuracy or delinquency penalty on all applicable years and, in lieu of all other penalties that may apply, pay a penalty equal to 20% of the amount in the foreign accounts in the year with the highest aggregate value. While severe, the penalties imposed under the voluntary disclosure program pale in comparison to other civil or criminal penalties that a taxpayer may be subjected to for non-reporting and non-compliance. The civil penalty for failing to file an FBAR can be as high as the greater of $100,000 or 50% of the total balance in the foreign account and criminal penalties for tax evasion and filing false returns can be fines of up to $250,000 and prison terms of up to five years.

The voluntary disclosure program is not available to taxpayers who are currently under examination by the IRS. Additionally, the program is not designed for taxpayers who have reported and paid tax on all their taxable income from foreign accounts but have failed to file annual FBARs. Those taxpayers should file the delinquent reports as soon as possible with the IRS Philadelphia Offshore Identification Unit. No penalites will be imposed on the late filing of the FBAR forms, as long as it is done by the September 23^rd deadline under the terms of the program.

If you believe you have a foreign bank account reporting requirement, or have previously unreported income from foreign accounts, please consult your Sheehan & Company service partner for guidance. The IRS voluntary disclosure program terminates September 23, 2009.