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Tax, Uncategorized

Foreign Bank Account Reporting – Special Voluntary Disclosure Initiative

If you are a U.S. citizen living in Canada, the following may be of interest.

On February 8, 2011 the Internal Revenue Service (IRS) issued IR-2011-14, a Special Voluntary Disclosure Initiative designed to bring offshore money back into the United States tax system and help taxpayers that have undisclosed income become current with their taxes. The new Voluntary Disclosure Initiative (similar to the 2009 initiative) is available through August 31, 2011.

There will be a new penalty framework requiring individuals to pay a penalty of 25% of the amount in the foreign bank accounts in the year with the highest aggregate balance covering the 2003 to 2010 tax years. Some taxpayers will be eligible for 5% or 12.5% penalties. Participants must also pay back-taxes and interest for up to eight years, as well as paying accuracy-related and/or delinquency penalties.

Taxpayers will have until August 31, 2011 to:

  • Consult a tax attorney
  • File back returns for years 2003-2010 (eight years, different from the six years in the past)
  • Pay Tax and Interest, Late Filing Penalty, Late Payment Penalty and a 20% Accuracy Related Penalty on any tax owing
  • File back Foreign Bank Account Reporting (FBAR) returns for years 2003-2010
  • Pay 25% penalty of the amount in the foreign bank accounts in the year with the highest aggregate account balance covering 2003 to 2010 time period.

The 25% penalty can be reduced to 5% or 12.5% in the following situations:

  • The reduced 5% penalty is available for taxpayers who are foreign residents and who were unaware they were U.S. citizens. However, if you knew that you were a U.S. citizen and never inquired about your U.S. tax obligations then you are not entitled to the reduced 5% penalty; instead you are subject to the 25% penalty.
  • If the offshore accounts are less than $75,000 in each of the calendar years covered (2003-2010) then they will qualify for the 12.5% penalty.

International tax enforcement is the top priority for the IRS and the Tax Division of the Department of Justice. The IRS efforts in the international arena will only increase as time goes on.

Now is the time to become current in compliance with tax return filing and FBAR reporting. If taxpayers do not come forward by August 31, 2011 the penalties for late filing of the FBAR become 50% of the highest aggregate account balance per year (which could add up to substantially more than what is in the account), potential fraud penalties and potential criminal charges.

If you would like to discuss how this may impact you, please contact Richard Rizzo at (905) 633-6332 or email .(JavaScript must be enabled to view this email address).

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