US Expat Taxes Explained: Offshore Voluntary Disclosure Initiative

UPDATE: The deadline has been extended to September 9th, 2011!

US citizens are taxed on their worldwide income, and are required to file US Expat Taxes if their income exceeds the Federal filing threshold, even with income from anywhere in the world. However, there have been numerous US citizens who have moved abroad and assumed that their lack of US-source income meant that they didn?t have to report or pay US Expat Taxes to the US government. This couldn?t be more wrong. Because of the many US citizens who have made this costly assumption, the US government has made various attempts to help expatriates become compliant with their US Expat Tax responsibilities. The effort currently in place is called the 2011 Offshore Voluntary Disclosure Initiative (OVDI) and is available until August 31, 2011, or later with an approved extension.

What Is The Offshore Voluntary Disclosure Initiative?


US citizens who have authority over foreign financial accounts whose cumulative balances exceed $10,000 USD at any one point in the tax year must file a Report of Foreign Bank and Financial Accounts (FBAR), Treasury Department Form TD F 90-22.1. Failing to file this form properly can result in stiff penalties and even criminal prosecution!
The 2011 OVDI provides US Expat Taxpayers who have failed to comply with FBAR filing requirements the opportunity to do so with reduced penalties. The IRS offered a similar program in 2009, with great success. Although the 2011 program has more rigid requirements and less of a penalty reduction, it still provides a ?way out? for US citizens who want to become compliant, but fear the consequences. More information about FBAR filing requirements can be found in our ?US Expat Taxes Explained? series.

Who Is the Offshore Voluntary Disclosure Initiative For?



The 2011 OVDI is for any US taxpayer who is out of compliance with their FBAR filing requirements. Of course, as with nearly every piece of US Expat Tax law, there are exceptions to this. The 2011 OVDI is not for:

• Taxpayers whose returns are currently under examination by the IRS,
• Taxpayers who have already been notified by the IRS that they are not in compliance, or
• Taxpayers who have reported and paid all of their US Expat Tax, unaware of their FBAR filing requirements (these taxpayers can simply file the outstanding FBAR reports, attaching a statement explaining their reasons for not filing),

The 2011 is for:

• US Expat Taxpayers who have knowingly failed to file an FBAR,
• Taxpayers who want to voluntarily want to become compliant with IRS tax reporting requirements

Many taxpayer facing compliance issues are concerned about the hefty US Expat Tax liabilities requiring immediate payment. While this concern will not go away, it?s important to note that the IRS can and will establish installment agreements and other forms of debt settlement for taxpayers. Being proactive and voluntarily disclosing your US Expat Tax liability will work in your favor when attempting to establish payment arrangements with the IRS. If you are unable to pay at this time, and can prove this situation to the IRS, you may even be eligible for debt forgiveness or penalty relief.

How Does the Offshore Voluntary Disclosure program work?



Without a Voluntary Disclosure Initiative in place, the penalties for failing to timely file an FBAR include:

• FBAR penalty ? 50% of the total aggregate value of all of your foreign accounts.
• Failure to file and failure to pay penalties (approximately 25% of the unpaid income tax ? read more about these penalties on our ?US Expat Taxes Explained? series)
• Accuracy Related penalty (20% of the income tax associated with the foreign accounts)

It?s important to note that the IRS takes the reporting requirements for FBARs and other informational returns (5471, 5472, 3520, etc) very seriously. If a US Expat Taxpayer is found to have fraudulently and intentionally failed to file their FBAR, the IRS can assess a 75% fraud penalty as well as pursue criminal prosecution. Failing to file an FBAR subjects a person to a prison term of up to ten years and criminal penalties of up to $500,000.
For example, in 2007, Edward Expat has $5,000 in a Swiss bank account, $6,000 in a British bank account and $2,000 in a German bank account. The cumulative balances of these accounts total $13,000, so he is required to file a FBAR by June 30, 2008. By failing to do so, he incurs a 50% FBAR penalty of $6,500 ($13,000 * 50%). These accounts also earned $500 in interest income, and can incur an additional $225 in accuracy related, failure to file and failure to pay penalties. Failing to report these bank accounts and their associated income can cost Edward $6,825!!
If we assume that Edward held the same account balances in 2008 and 2009, yet failed to report this information to the IRS via his US Expat Taxes, he could be faced with a significant balance due to the IRS. However, by taking advantage of the 2011 OVDI before August 31, 2011, he can become compliant on all of his reporting requirements with significantly reduced penalties. The IRS has also recently announced the opportunity to extend this deadline by 90 days with proper communication. Under the 2011 OVDI, the penalties are calculated at either 5%, 12.5% or 25% of the highest year?s cumulative account balance. Taxpayers eligible for a 5% penalty must have not opened the account themselves, had ?minimal? interaction with the account, and never withdrew more than $1,000 in one year. If the highest cumulative balance is less than $75,000, the US Expat Taxpayer will be eligible for the 12.5% penalty rate. All other taxpayers are subject to the 25% penalty. In Edward?s case, the highest year?s cumulative account balance was $14,500 in 2009, putting him at the 12.5% penalty rate.
Rather than paying an FBAR penalty of 50% for each year, under the 2011 OVDI, Edward will only pay 12.5% on the highest year, which is $1,813 ($14,500 * 12.5%). He will also owe the accuracy related, failure to file and failure to pay penalties on the under-reported interest income for each year.

Offshore Voluntary Disclose Initiative (OVDI) for US Expats

wuarhat said:

This is about the reporting of foreign held assets, not foreign earned income. Both are required to be reported. I'm pretty sure that each member of the family can have accounts with less than the $10,000 threshold value without reporting it.

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The $10k figure is cumulative and if this has nothing to do with income, why do they talk about income taxes, starting right at the first line?

WASHINGTON (AP) -- About 12,000 tax cheats have come clean under a program that offered reduced penalties and no jail time to people who voluntarily disclosed assets they were hiding overseas, the Internal Revenue Service announced Thursday.
Those people have so far paid $500 million in back taxes and penalties, with more to come, IRS Commissioner Doug Shulman said.
The voluntary disclosure program, which ran from February to last week, is part of a larger effort by the IRS to crack down on tax dodgers who hide assets in overseas accounts. The agency stepped up its efforts in 2009, when Swiss banking giant UBS AG agreed to pay a $780 million fine and turn over details on thousands of accounts suspected of holding undeclared assets from American customers.
Since then, the IRS has opened new enforcement offices overseas, beefed up staffing and expanded cooperation with foreign governments. A similar disclosure program in 2009 has so far netted $2.2 billion in back taxes, penalties and fines, from people with accounts in 140 countries, Shulman said.
Between the two disclosure programs, a total of 30,000 tax cheats have come clean.
"The world has clearly changed," Shulman said. "We have pierced international bank secrecy laws, and we're making a serious dent in offshore tax evasion."
The IRS has long had a policy that certain tax evaders who come forward can usually avoid jail time as long as they agree to pay back taxes, interest and hefty penalties. Drug dealers and money launderers need not apply. But if the money was earned legally, tax evaders can usually avoid criminal prosecution.
Fewer than 100 people apply for the program in a typical year, in part because the penalties can far exceed the value of the hidden account, depending on how long the account holder has evaded U.S. taxes.
The latest disclosure program offered reduced penalties, but it was no free walk. Taxpayers were required to pay up to eight years of back taxes and a penalty of up to 25 percent of the highest annual amount in the overseas account from 2003 through 2010.
The disclosure programs have also provided the IRS with information about banks and advisers who have assisted people with offshore tax evasion. Shulman said the agency will use the information to continue its enforcement efforts.
"Unlike a few years ago, it's very clear now that there's a real price to be paid for people who think they can hide offshore and not pay their taxes," he said

wuarhat said:

That's what I was wondering. The first couple of sentences lead you to believe it is going to be about income taxes and then it ends up being about "compliance with ... FBAR filing requirements" which is the reporting of assets, not income.

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I think they are looking for red flags.
Some people don`t want to disclose their assets because they are out of whack with their reported level of income.

U.S. tax evasion crackdown unfair to Canadians: Flaherty

A push by the American tax authorities to root out cheats is causing anxiety among dual citizens north of the border, and has prompted a blunt response from Finance Minister Jim Flaherty.

"Most of these Canadian citizens, many with only distant links to the United States, have a very limited knowledge of their tax reporting obligations to the United States," Flaherty wrote in a letter published in major U.S. newspapers including The New York Times, The Wall Street Journal and The Washington Post.

"These are honest and law-abiding people, including many senior citizens now caught in a nerve-wracking situation," the letter continues. "Their only transgression is failing to file the (Internal Revenue Service) paperwork they were never aware they were required to file."

The recent crackdown by the IRS could be expensive for many Canadian with dual citizenship. They face fines of up to $100,000 or half the value of each asset, whichever is bigger. Even those who voluntarily file now may be penalized $10,000 for each account.

Americans are required to file a return annually regardless of where they live or work. Since 2009, the IRS boasts that it has collected $2.7 billion from 30,000 people worldwide.

American-born Maury Williams moved to Canada 40 years ago. He's always paid taxes here and owes none in the U.S. but he still can't escape the taxman south of the border.

"The long arm of the U.S. is reaching into Canada," he told CTV News. "So I am estimating in the end it's going to cost me somewhere in the order of $30,000."

While Williams is paying up for fear of arrest if he goes to the U.S., many of the estimated 1 million dual citizens who pay taxes in Canada had no idea they also had to file in the U.S.

Some are now hiding from fines that could run into the millions.

One man, who asked not to be identified, said that his liability amounted to everything he has.

"We're being made into criminals because we didn't fill in this myriad of forms," he said.

Canadian banks are also being targeted under the U.S. legislation. In three years, they'll face added tax on U.S. profits if they don't turn over the names of American customers.

As Terry Campbell, president and CEO of the Canadian Bankers Association, put it: "They're trying to conscript Canadian banks to act as an arm of the U.S. tax authorities and we don't think that's the way to do it."

U.S. tax evasion crackdown unfair to Canadians: Flaherty - CTV News