Foreign Financial Asset Disclosures

Foreign Financial Asset Disclosures

• In IR-2014-73 the IRS has announced changes in two of its programs related to offshore accounts. 
• The IRS has modified the terms of the Offshore Voluntary Disclosure Program (OVDP), which allows individuals to avoid criminal prosecution if they disclose their foreign accounts and pay a substantial penalty. 
• The IRS has expanded the streamlined filing compliance process, or “streamlined procedures,” which are aimed at US taxpayers who have failed to disclose their foreign accounts but who are not willfully evading their tax obligations. These programs are part of a wider effort to stop offshore tax evasion, which includes enhanced enforcement, criminal prosecutions, and implementation of third-party reporting via the Foreign Account Tax Compliance Act (FATCA). 

Changes include:

• Additional taxpayer information requirements. 
• Taxpayers are no longer exempt due to a "risk" questionnaire and unpaid taxes of less than $1,500. Treasury Department and Department of Justice have pledged to pursue every non-compliant person. 
• Taxpayers must submit all account statements and pay the offshore penalty at the time of the OVDP application. 
• Taxpayers are allowed to submit voluminous records and supporting documents electronically rather than on paper. 
• To be in compliance when submitting an OVDP Application, accounting must be complete and accurate and payments must be made in full. 
• US Taxpayers residing in the US can be subject to a special 5% OVDP asset penalty. 
• US taxpayers living abroad may apply to have OVDP asset penalties waived. 
• Increased penalties, (27.5% to 50%), incentive for holders of hidden assets to come in sooner if they are concerned about the possibility of an investigation, for taxpayers who invest in institutions that are under DOJ federal investigation. 
• A non-willful conduct testament can assist some taxpayers with compliance. 
• Penalties can be eliminated for some non-willful taxpayers. 
• The 50% penalty is comprehensive and applies to foreign partnerships, stock holdings and all other investments. 

Foreign Account Reporting Requirements

• There are a number of reporting requirements for taxpayers with foreign accounts. 
• Affected taxpayers must fill out and attach to their 1040 tax return, Schedule B, which asks about the existence of foreign accounts, (check "Box B" Yes or No). 
• Some taxpayers have to fill out Form 8938, Statement of Foreign Financial Assets. 
• Other filing requirements apply to foreign trusts. 
• Taxpayers with foreign accounts whose aggregate value exceeds $10,000, at any time during the year, must file a Form 114, Report of Foreign Bank and Financial Accounts (FBAR) electronically through the Financial Crimes Enforcement Network’s (FinCEN) BSA E-Filing System. 
• Failure to comply with applicable reporting requirements can result in civil and criminal penalties.

On July 1, 2014, the new information reporting regime instituted by FATCA will go into effect. Thousands of foreign financial institutions will begin to report to the IRS the foreign accounts held by US persons.

Courtesy:  MaSEA

References: CCH

IRS Offshore Voluntary Disclosure Efforts Produce $6.5 Billion; 45,000 Taxpayers Participate