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IRS tweaks foreign account reporting rules, amnesty continues p2

We are continuing our discussion of foreign asset reporting and a few IRS rule changes that should make compliance easier for taxpayers. Most of the changes are the result of the Foreign Account Tax Compliance Act of 2010. The IRS is hoping that a streamlined process and some significant incentives will encourage taxpayers to report now, even if they have spent the last 10 years deliberately hiding assets deposited in foreign banks.

It is easier to avoid penalties by disclosing those assets in your annual tax return. 

At the same time, taxpayers should understand that FATCA makes it harder not to disclose. Rather than relying solely on taxpayers to fess up, the IRS now requires foreign financial institutions to send the IRS rosters of accounts held by U.S. taxpayers. Remember, U.S. citizens must file tax returns regardless of where they live.

In the interest of full disclosure, we should say that the law goes into effect on July 1. After that date, though, it will also be much easier for the IRS to identify taxpayers who do disclose foreign assets on their annual returns.

For the time being, one program, the offshore voluntary compliance program, is offering an amnesty of sorts to taxpayers who did not disclose foreign assets with their annual returns. If a taxpayer files all the proper paperwork during the amnesty period, the IRS grants the taxpayer immunity from criminal prosecution.

Failure to disclose also comes with fairly stiff civil penalties, and the amnesty addresses those, too. Generally, a failure to disclose will cost the taxpayer 50 percent of the unreported account's highest balance over the eight years immediately preceding the disclosure. The program has lowered that penalty to 27.5 percent in some cases and possibly lower in some specific cases.

The OVDP is not the only option. We will describe the alternatives in our next post.

Source: Forbes, "IRS Offers New Incentives To Disclose Foreign Bank Accounts," Deborah L. Jacobs, June 18, 2014

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