The IRS And Treasury Department Issue Final Regulations Aimed At Offshore Tax Evasion

Posted On Monday, January 28, 2013

The U.S. Treasury Department and IRS recently announced final regulations directed at enforcement of the 2010 Foreign Account Tax Compliance Act (“FATCA”) and combating offshore tax evasion.  These new regulations require foreign financial institutions – termed “FFI’s” – to identify and report to the IRS information regarding financial accounts held by U.S. taxpayers or by foreign entities in which U.S. taxpayers hold a substantial ownership interest.  Participating FFI’s can be required to withhold a 30% tax on transactions to non-participating FFI’s who are unwilling to provide the required information.  The Treasury Department worked with over 50 countries, including the United Kingdom, Mexico, Norway, Denmark, Ireland, Switzerland, and Spain, to establish intergovernmental agreements that mandate the reporting of financial information by FFI’s.

These recent regulations are part of a larger strategy by the IRS to identify foreign accounts or ownership interests held by U.S. taxpayers.  In January 2012, the IRS began its 2012 Offshore Voluntary Disclosure Program, which seeks to incentivize individuals to report previously undisclosed income from offshore accounts.  The IRS claims that taxpayers who participate in the offshore disclosure program will avoid substantial civil penalties and “generally” eliminate the risk of criminal prosecution.  The 2012 Offshore Voluntary Disclosure Program is a throwback to the 2009 and 2011 offshore disclosure programs, all of which are viewed as a success based on their collection of over $5 billion in back taxes, interest, and penalties from over 34,000 voluntary disclosures.

Using the “Report of Foreign Bank and Financial Accounts,” more commonly known as an “FBAR,” U.S. taxpayers with foreign accounts must annually report all accounts maintained with an FFI if the total value of the accounts exceed $10,000 at any time during the year.  The FBAR requires taxpayers to identify an account’s maximum value during the year, the name and address of the financial institution, and the account number.  The civil penalty for willfully failing to file an FBAR can be the greater of $100,000 or 50% of the balance of the foreign account for each violation.  The criminal penalty for failure to file an FBAR can be up to five years imprisonment and a fine of $250,000 for each violation.