Report Your Offshore Accounts
If you are a taxpayer with offshore financial accounts, you could be in trouble with the IRS and not even know it.
The Bank Secrecy Act was passed in 1970 to fight overseas money laundering. It requires that certain financial accounts based in foreign countries be reported to the IRS through a document called the Foreign Bank Account Report (FBAR) if these accounts have a total value exceeding $10,000 at any time during a calendar year (not the average balance for the year). This includes money in any savings or checking accounts in a foreign financial institution, as well as equity accounts such as mutual funds.
While the law is certainly well-intentioned, it unfortunately snares innocent foreigners like physicians who legitimately made their money outside the U.S. Unlike the United States, most countries do not tax the income their citizens make beyond their borders so it might not occur to new American citizens, resident aliens ... or even their accountants ... that they have to report these assets to the IRS. (Few CPAs delve into foreign tax issues, but being an immigrant myself from South Africa and having numerous foreign clients, it behooves me to stay abreast of the latest regulations.)
Unfortunately, ignorance of the law probably won't prevent the IRS from imposing stiff penalties for not filing a FBAR. A willful failure to file could carry criminal prosecution, as well as criminal or civil penalties.
So what can taxpayers with foreign accounts do to avoid potential penalties? First, come clean. You can run but you can't hide -- banks readily share information with each other so it's fairly certain the IRS will discover any undisclosed foreign accounts.
If you willfully failed to report foreign accounts in the past but the IRS has yet to discover it, you could still avoid the stiffest penalties and prosecution by participating in the Offshore Voluntary Disclosure Program (OVDP), which is specifically designed to provide protection from criminal liability and terms for resolving your civil tax and penalty obligations.
In recent years, the U.S. expanded the OVDP to include the Streamlined Filing Compliance Procedures (known as the Streamlined Program) for non-willful foreign account holders. Penalties could be as little as 5 percent of the maximum undisclosed amount.
Although the Bank Secrecy Act might seem to unfairly target foreign doctors and other professionals, it is nevertheless routinely enforced. Find an advisor who understands this specific area of the tax code to ensure that the FBAR and other paperwork are filed in a timely manner.
Report offshore financial accounts before the IRS finds out about them. Otherwise, you could be out of good options.
Larry Sacks, CPA, is a principal at Snow Creek Wealth Management in Nashville, which helps clients build, preserve and manage wealth through financial planning, accounting and investment management. For more information, email email@example.com or go online to snowcreekwealth.com.