Time is running out on taxpayers who would like to take advantage of an IRS program that permits U.S. taxpayers who have failed to file Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts ("FBAR"), as well as other information returns related to foreign holdings, to cure the failure while avoiding substantial penalties.
This IRS guidance allows a taxpayer who inadvertently failed to file one of these forms to make the required information filings and, if he or she properly reported all of his or her income and paid the requisite tax, avoid the payment of the substantial penalties. However, taxpayers must act quickly, as the delinquent information returns must be filed by September 23, 2009. There are certain exceptions to this filing requirement which may be applicable to a particular client. For example, certain foreign persons may be eligible for special determination of "residency" pursuant to particular tax treaty provisions.
Each United States person who has a financial interest in, or signature or other authority over, any foreign financial accounts that exceed $10,000, in the aggregate, at any time during the calendar year is required to file an FBAR disclosing the accounts to the U.S. Department of the Treasury on or before June 30 of the succeeding year. The term "United States person" means a citizen or resident of the United States.
Foreign financial accounts include any bank, securities, securities derivatives, or other financial instrument accounts located in a foreign country, including an account in which the assets are held in a commingled fund and the account owner holds an equity interest in the fund (e.g., mutual funds). A reportable account also includes any savings, demand, checking, deposit, time deposit, or any other account (including debit card and prepaid credit card accounts) maintained with a financial institution, or other person engaged in the business of a financial institution, in a foreign country. The penalty for a willful failure to file a required FBAR is equal to the greater of $100,000 or 50 percent of the account balance at the time of the violation. The penalty for a non-willful failure to file is $10,000 for each violation. There is also potential criminal liability related to evading U.S. taxes through the use of foreign accounts.
The IRS has stated that taxpayers who reported and paid tax on all their taxable income for prior years but did not file the requisite FBARs should file the delinquent forms and attach a statement explaining why the reports are being filed late. Copies of the delinquent FBARs, along with copies of the taxpayer's tax returns for all relevant years, must also be filed with the IRS. The IRS stated it will not impose a penalty for the failure to file such forms if the taxpayer reported and paid the requisite tax in the prior years. The same rules apply to taxpayers who have failed to file Form 3520, Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts, and Form 5471, Information Return of U.S. Persons With Respect to Certain Foreign Corporations.