Individuals and businesses must report foreign financial interests — (i.e., bank accounts, securities, brokerage accounts, mutual funds, etc.) — to the IRS annually.
Disclosing Foreign Assets
United States tax laws require U.S. citizens and permanent residents to disclose foreign assets if a parties’ combined holdings exceed $10,000 at any time during the tax year. Assets are typically reported along with annual tax returns via an FBAR, or Report of Foreign Bank and Financial Accounts.
FBAR penalties start at $10,000 per return. When the IRS notifies parties of filing delinquencies, taxpayers have 90 days to file and pay up. If a taxpayer doesn’t respond within 90 days, an additional $10,000 per month is imposed on each outstanding return, triggering civil penalties that can reach a maximum of $50,000 per return. Inaccurate returns may incur penalties of 20% to 40%. Wilful failure to submit FBARs can result in civil penalties up to 75% of the unpaid tax. Taxpayers who don’t file annual tax returns are subject to audits, as well as increased penalties.
The Offshore Voluntary Disclosure Program
The IRS developed the Offshore Voluntary Disclosure Program (OVDP) to help taxpayers who owe penalties on foreign accounts. The program focuses on taxpayers who may face substantial fines or criminal charges due to willful failure to report foreign financial assets and remit proper taxes.
Reporting foreign financial holdings can be complex, especially when a taxpayer has multiple accounts. To address common concerns, the IRS published a list of ODVP questions and answers that provides valuable information on the program. The IRS encourages taxpayers to use the ODVP to get compliant.
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