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Deadline Coming Up to Report Foreign Account Holdings

Posted on Mon, May 20, 2013

The IRS is continuing its efforts to find taxpayers who don't report accounts they hold in foreign financial institutions. The deadline for filing an IRS form (if you meet certain requirements) is coming up on June 30, 2013. Failing to comply can result in penalties under the Bank Secrecy Act. Here are the details, along with a new IRS announcement that the U.S. is now sharing tax information with Australia and the U.K. to help fight offshore tax evasion.

New Joint Effort to Fight
Offshore Tax Evasion

The tax administrations from the United States, Australia and the United Kingdom announced a plan to share tax information involving a multitude of trusts and companies holding assets on behalf of residents in jurisdictions throughout the world.

The three nations have each acquired a substantial amount of data revealing extensive use of such entities organized in a number of jurisdictions including Singapore, the British Virgin Islands, Cayman Islands and the Cook Islands.

"The data contains both the identities of the individual owners of these entities, as well as the advisors who assisted in establishing the entity structure," stated the IRS in a release. (IR-2013-48)

The IRS, Australian Tax Office and HM Revenue & Customs have been working together to analyze this data and have uncovered information that may be relevant to tax administrations of other jurisdictions. They have developed a plan for sharing the data, as well as their preliminary analysis, if requested by those other tax administrations.

"This is part of a wider effort by the IRS and other tax administrations to pursue international tax evasion," said IRS Acting Commissioner Steven T. Miller. "Our cooperative work with the United Kingdom and Australia reflects a bigger goal of leaving no safe haven for people trying to illegally evade taxes."

There is nothing illegal about holding assets through offshore entities. However, such offshore arrangements may be used to avoid or evade tax liabilities on income represented by the principal or on the income generated by the underlying assets.

"It is expected that this multilateral cooperation and coordinated effort will allow many countries to efficiently process this information and effectively enforce any laws that may have been broken," the IRS stated.

Tax administrations are increasingly working together to assist one another in identifying non-compliance with laws.

Consult with your tax adviser if you hold assets through offshore entities to ensure compliance.

The deadline is approaching for certain taxpayers to report accounts they hold in foreign banks and other financial institutions.

By June 30, 2013, citizens and residents of the United States, as well as domestic partnerships, corporations, estates and trusts, must generally file Form TD F 90-22.1 Report of Foreign Bank and Financial Accounts (FBAR) if:

1.They have a direct or indirect financial interest in, or signature authority over, one or more accounts in a foreign country. This includes bank accounts, brokerage accounts, mutual funds, trusts or other types of foreign financial accounts.

2.The total value of the accounts exceeds $10,000 at any time during the calendar year.

Taxpayers also may be subject to FBAR compliance if they file an information return related to: certain foreign corporations (Form 5471); foreign partnerships (Form 8865); foreign disregarded entities (Form 8858); or transactions with foreign trusts and receipt of certain foreign gifts (Form 3520).

Some individuals are exempt.

There are FBAR filing exceptions for the following United States persons or foreign financial accounts:
• Certain foreign financial accounts jointly owned by spouses;
• United States persons included in a consolidated FBAR;
• Correspondent/nostro accounts;
• Foreign financial accounts owned by a governmental entity;
• Foreign financial accounts owned by an international financial institution;
• IRA owners and beneficiaries;
• Participants in and beneficiaries of tax-qualified retirement plans; and
• Certain individuals with signature authority over, but no financial interest in, a foreign financial account.

To determine eligibility for an exception, consult with an EHTC tax adviser.

Take the FBAR requirement seriously. Several legislative changes, as well as a clarification of the IRS's interpretation of the "willful standard," have led to increased enforcement and stiffer penalties for noncompliance of foreign account reporting requirements.

The IRS states that the form "is a tool to help the United States government identify persons who may be using foreign financial accounts to circumvent United States law. Investigators use FBARs to help identify or trace funds used for illicit purposes or to identify unreported income maintained or generated abroad."

Failing to file an FBAR can result in the following penalties:

• A civil penalty of as much as $10,000 if the failure was not willful. This penalty may be waived if income from the account was properly reported on the income tax return and there was reasonable cause for not reporting it.
• A civil penalty equal to the greater of 50% of the account or $100,000, if the failure to report was willful.
• Criminal penalties and time in prison.

Consult with an EHTC tax adviser if you have an interest in, or authority over, a foreign account. Your tax adviser can ensure you meet the FBAR reporting requirements and remain in compliance with the law.

 

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