Foreign Bank Deposits and Financial Assets
The Jaws are Closing on the U.S. Taxpayer
by Richard S. Lehman, P.A.

On March 23, 2009 the I.R.S. initiated an Amnesty Program for the purpose of permitting taxpayers with foreign bank deposits to fully disclose these foreign deposits and avoid criminal sanctions as long as the taxpayer was not under investigation by I.R.S. at the time of the disclosure and the income involved was earned form legal sources. (The “Amnesty Program”).

The Amnesty Program also assured taxpayers in the program of a fixed calculable amount of all the costs involved that included, taxes, penalties and interest, necessary to pay off in full any civil liabilities owed by the taxpayers.

The Amnesty Program caused at least 7,500 taxpayers to come forward for the benefits of the program. The program was terminated on October 15, 2009.

Other than assuring taxpayers of a fixed amount of money that would be due to the I.R.S. and adding certain procedural protections of a taxpayer, the Amnesty Program did not differ from and was based upon the long standing Voluntary Disclosure Program. Under this Program, the I.R.S. has accepted late filed and amended returns without applying any criminal penalties for decades so long as the requirements of the Voluntary Disclosure Program were met.

Many taxpayers now regret the fact that they did not accept the I.R.S. Amnesty Program. This is because the Voluntary Disclosure Program, like the Amnesty Program, will still permit taxpayers to avoid criminal prosecution with a Voluntary Disclosure of all previous taxes due. However, the Voluntary Compliance Program does not provide the taxpayer with any guarantees of the amount that may be assessed against a taxpayer for the complete payment of all taxes, interest and in particular, penalties that are due. Under the worst of circumstances, these potential penalties can easily exhaust the long term build-up of a foreign bank deposit upon which taxes were not paid.

This article is not about the Voluntary Disclosure Program, though future articles will be published on this Website that will describe the Voluntary Disclosure Program. This article is about the actions that are being taken now by the U.S. to force the full disclosure of all foreign assets and income of U.S. taxpayers. This article is intended to encourage high net worth individuals with unreported foreign income and assets to take advantage of the I.R.S. Voluntary Disclosure Program as soon as possible so that they avoid criminal actions and to limit their civil penalties before it is too late. The U.S. is moving fast on high net wealth tax payers, especially with overseas assets.

High net worth taxpayers with foreign income and foreign assets must be aware that two actions were recently taken on the exact same date aimed at U.S. taxpayers with foreign assets. One step was taken by the Internal Revenue Service and the other by the House of Representatives in a proposed new bill presently known as HR.3933.

The Internal Revenue Service announced that a new division was recently established to specifically audit and deal with wealthy Americans who are hiding assets. This was announced by I.R.S. Dave Schulman and reported on October 27th. According to Commissioner Schulman, the I.R.S. is going to take a “unified look” at the entire web of business entities controlled by a high wealth individual”.

Almost simultaneous with this announcement by the I.R.S. of this specialized audit group, on October 27th the House of Representatives announced the introduction of the “Foreign Account Tax Compliance Act”. This new law would force foreign financial institutions, foreign trusts, foreign corporations and tax advisers involved with such entities to provide information about US. account holders, owners, guarantors and clients with those entities.

The bill in essence will require foreign financial institutions, trusts, foreign corporations and other entities that earn income from U.S. financial assets to withhold a 30% tax on that income and pay it to the U.S. unless that foreign institution agrees to disclose the identity of any U.S. persons, both directly and indirectly, with accounts in those institutions.

High net worth individuals with foreign assets will soon find that they are squeezed between these two new actions and forced to fully disclose all of their income from whatever sources or suffer serious penalties with serious jail time and financial burdens.

The following is a short summary of this new proposed bill.

• The bill would impose a thirty percent (30%) withholding tax on income from U.S. financial assets held by a foreign financial institution unless the foreign financial institution agrees to disclose the identity of any U.S. individual with an account at the institution (or the institution’s affiliates) and to annual report on the account balance, gross receipts and gross withdrawals/payment from such account. Foreign financial institutions would also be required to agree to disclose and report on foreign entities that have substantial U.S. owners.

• The bill would require foreign corporations to provide withholding agents with the name, address and tax identification number of any U.S. individual that is a substantial owner of the foreign corporation (i.e., owns more than ten percent (10%) of the foreign corporation’s stock (by vote or value)).
  

• The bill would require any individual that holds more than $50,000 (in the aggregate) in (1) a depository or custodial account maintained by a foreign financial institution or (2) any foreign stock, interest in a foreign entity, or financial instrument with a foreign counterparty not held in a custodial account of a financial institution (collectively, “reportable foreign assets”) to report information about these accounts and/or assets to the U.S. Treasury Department with the individual’s annual tax return. Failures to comply with this requirement would be subject to a penalty of $10,000, and higher penalties (up to $50,000) could apply if the failure is not remedies within 90 days following notification from the Treasury Department.

• Penalties for underpayments attributable to undisclosed foreign financial assets. The bill would impose a penalty equal to forty percent (40%) of the amount of any understatement that is attributable to an undisclosed foreign financial asset (i.e., any foreign financial asset that a taxpayer is required to disclose and fails to disclose on an information return).

• Advisors who help set up offshore accounts would be required to disclose their activities or pay a penalty.

• The bill strengthens rules and penalties with regard to foreign trusts, including rules to determine whether distributions from foreign trusts are going to U.S. beneficiaries and reporting requirements on U.S. transfers to foreign trusts.

If you are like many others who are still confused,
it is now time you contact a tax attorney.