Mandatory Reporting of Offshore Bank and Financial Accounts
Under federal law, taxpayers are required to disclose foreign bank and financial accounts. Taxpayers generally must check a box on IRS Form 1040 Schedule B to indicate their ownership of assets in a foreign bank or investment account. Taxpayers also must file IRS Form TD F 90.22-1, Report of Foreign Bank or Financial Account ("FBAR"), to disclose information about foreign accounts worth more than $10,000 at any time during the tax year. A failure to report foreign assets can result in substantial penalties and, in certain cases, criminal charges.
Taxpayers are also required to disclose investments in certain foreign corporations by filing IRS Form 5471. Failure to file this form can also result in significant penalties. Requirements for filing Form 5471 and the FBAR are separate and one filing generally is not a substitute for the other.
Governmental Scrutiny of Foreign Accounts
The Internal Revenue Service (the "Service") and the U.S. Department of Justice continue to aggressively pursue information about taxpayers that may have undisclosed interest in foreign bank accounts. In a recently publicized court decision, the Service obtained an order allowing it to seek information from UBS AG, a banking organization based in Switzerland.1 The United States Department of Justice has now obtained more than 250 names of U.S. citizens with UBS accounts, and is actively pursuing UBS to try to obtain the names of an estimated 52,000 U.S. citizens with undisclosed foreign bank and investment accounts.
News publications continue to report aggressive governmental actions and negotiations with respect to U.S. investors with offshore accounts.2 Moreover, many within the government predict that investigations currently in process at UBS will be expanded to other investment companies and banks, and to other "tax haven" countries that historically have had strict bank secrecy laws (e.g., Bahamas, Cayman Islands, etc...).
Taxpayer Issues and Voluntary Disclosure Considerations
Any taxpayer with a UBS account should carefully review prior tax reporting. In addition, for taxpayers who have, or have ever had, a previously disclosed foreign bank or financial account of any kind, immediate actions should be considered. Certain options may be available to minimize exposure to both financial penalties and criminal prosecution. If a U.S. citizen is disclosed and contacted by the IRS, there may be an opportunity to disclose foreign accounts at that point; however, such an opportunity may be limited. For many investors, a better alternative is to consider proactive pursuit of a "Voluntary Disclosure Agreement" with the Service in an effort to minimize penalties and, more importantly, to avoid a criminal prosecution.
The Service currently has no "formal" disclosure program available for taxpayers with undisclosed foreign bank and investment accounts. However, the Service has a longstanding policy supporting voluntary disclosures that taxpayers may be able to use to avoid civil and criminal penalties related to foreign bank and financial investment account holdings.