Wipfli Alerts & Updates: Window of Opportunity Closing for Taxpayers with Foreign Bank Accounts or Investments in Foreign Mutual or Other Similar Pooled Funds

The Internal Revenue Service has dramatically increased its focus on offshore tax reporting. At the same time, it has clarified the definition of accounts for which an annual disclosure form must be filed. If certain conditions are met, you must disclose your financial interest in or signature authority over your foreign bank, mutual, or other similar pooled fund account. Disclosure is made on Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts, commonly known as the FBAR. This Alert highlights several alternatives the IRS has laid out for you to "fix" prior omissions.

You should review your investment holdings now to determine whether you are required to file under the definitions included in the new regulations. Investments in foreign mutual funds and insurance and annuity policies with cash value are covered by these new rules. The FBAR must be filed annually by United States persons who have a financial interest in or signature authority over foreign financial accounts if the aggregate value of the accounts exceeds $10,000 at any time during the calendar year. This report must be filed on or before June 30 of each year.

Significant penalties exist for the failure to report qualifying foreign financial accounts, such as a $10,000 penalty per violation for the nonwillful failure to report the foreign account. The penalties rise in severity for willful failure to file, including criminal penalties and higher civil penalties. However, to encourage voluntary compliance and to “kick off” the implementation of the final regulations, for a limited time the IRS is offering several opportunities to alleviate these penalties.

Taxpayers with Unreported Income

Earlier this year, the IRS announced a new Offshore Voluntary Disclosure Initiative (2011 OVDI) aimed at encouraging U.S. taxpayers with unreported offshore accounts to voluntarily disclose them to the IRS. The 2011 OVDI is available to U.S. taxpayers until August 31, 2011, and creates a framework for U.S. persons to become compliant with U.S. reporting requirements at potentially reduced penalties. The general rule is that the penalty is 25% based on amounts in foreign bank accounts, but it can be as low as 12.5% or 5% for some taxpayers.

Entities and Individuals Who Properly Reported Income but Failed to Meet Reporting Requirements

Included as part of the 2011 OVDI, the IRS released guidance on its website that includes frequently asked questions (FAQ). FAQ 17 and FAQ 18 of this guidance provide relief for U.S. persons who properly reported income on their tax returns but failed to meet the informational requirements such as the FBAR or Form 5471. With these responses, the IRS provides an automatic waiver of the reporting penalties for the failure to file the FBAR. U.S. persons who qualify for this relief must file FBARs (or other required informational reporting forms) for years prior to calendar year 2010 by August 31, 2011, with a statement explaining why the reports are filed late.

Reports for calendar year 2010 remain due to the IRS by June 30, 2011.

Persons with Signature Authority Over and No Interest in Foreign Financial Accounts

FBAR filing requirements extend to U.S. persons who have signature authority over but no financial interest in foreign financial accounts. For example, this rule would apply to individuals who have signature authority over corporate or business financial accounts. Previously, with Notice 2010-23, the IRS granted an extension of time to file for persons who have only signature authority over foreign financial accounts because the IRS was looking for public comments regarding this requirement. Notice 2010-23 gave U.S. persons falling into this category until June 30, 2011, to file the report. With publication of the final regulations, the IRS slightly changed the guidance regarding this category and confirmed the requirement that people with signature authority of foreign financial accounts must file the FBAR, even if it results in multiple reporting of the same foreign financial account.

The three initiatives above present a window of opportunity for you to file previously unreported informational returns with reduced or no penalties. If you have a financial interest in or signature authority over a foreign financial account meeting the $10,000 threshold, please contact Stacy Secker at 715.858.6644 or your Wipfli relationship executive with any questions or for assistance in filing these returns.

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This information is provided solely for general guidance and informational purposes only and does not create a business or professional-services relationship. Accordingly, this information is provided with the understanding that the authors and publishers are not herein engaged in rendering legal, accounting, tax, or other professional advice and services. As such, it should not be used as a substitute for consultation with professional accounting, tax, legal, or other competent advisers and cannot be relied upon by any taxpayer for the purpose of avoiding penalties imposed under the Internal Revenue Code. Before making any decision or taking any action, you should obtain appropriate professional guidance.

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