It has been said that there is no small fry rule at the Internal Revenue Service. Over the past number of years, the IRS has campaigned against undisclosed foreign accounts and unreported income and its focus has broadened from large accounts at Swiss banks to the everyman. There are many legitimate reasons for holding offshore accounts-convenience and investment are most common. Avoiding payment of taxes is not one of them. U.S. citizens are required to report income from all sources, including income derived from offshore accounts.
Anyone who has an interest in or has signature authority over a foreign financial account exceeding a certain threshold amount is required to file an annual accounting to the U.S. Treasury on a Report of Foreign Bank and Financial Accounts (FBAR). Accounts required to be reported include bank accounts, mutual funds, brokerage accounts, or trusts. The threshold amount is the aggregate value of all such financial accounts exceeding $10,000 at any point during the calendar year. Failure to report the existence of such offshore accounts or pay taxes on these accounts can lead to civil and criminal penalties. For failing to file a FBAR, the penalty may be up to $10,000, if the failure to file is non-willful. If the failure is found to be willful, the penalty rises to the greater of $100,000 or 50 percent of account balances. There are also potential criminal consequences for a failure to file. Certain specified foreign assets are subject to further reporting requirements to the IRS on the form Statement of Specified Foreign Financial Assets, which must be filed with an income tax return. Those assets might be the same as required to be reported to the Treasury Department on FBAR, but the additional filing with the IRS is an independent requirement. The penalty for failure to file can reach $60,000.
New IRS rules
On June 18, 2014, however, the IRS issued new regulations affecting United States taxpayers living abroad as well as U.S. residents with foreign accounts. These taxpayers who had mistakenly failed to report foreign assets or income will be getting a break. Those who continue to evade will face even harsher penalties.
In accordance with these new rules, United States taxpayers who live abroad who failed to report foreign-held accounts by mistake will have penalties waived; previously, such reduced penalties were applied only if the unpaid taxes were less than $1,500. Taxpayers living in the U.S. will only be fined 5 percent of the assets involved; previous compliance programs were not extended to taxpayers living in the U.S.
For those who do not come forward and wait until federal authorities begin investigating the financial institutions holding their accounts, the penalty is a real bite-50 percent of the account balance.
Seeking experienced legal advice
Anyone who has offshore assets should be knowledgeable about the federal reporting requirements and anyone who has failed to file in the past should consult with an experienced Massachusetts tax attorney about the best course of action in light of these new federal rules.