San Francisco Tax Attorney: Foreign Income & Assets

2012 Offshore Voluntary Disclosure Program

The IRS announced a 3rd Offshore Voluntary Disclosure Program (OVDP) for U.S. taxpayers with unreported foreign income or financial accounts.

This program eliminates potential criminal penalties and reduces civil (monetary) penalties for taxpayers with previously undisclosed foreign income and assets.

Those who participate in the program must pay a penalty equal to 27.5% of the highest aggregate balance of their foreign assets since the 2003 tax year. In some cases, this penalty can be reduced to 5 - 12.5 %.

Participants must file all 2003 through 2011 tax returns or amended tax returns. They must also pay all back Federal taxes and interest on previously undisclosed foreign income.

Should you participate in the OVDP?

Participation in the OVDP may not be necessary if all foreign income had been previously reported on U.S. tax returns or foreign income is not reportable on a U.S. tax return, but FBARS have been filed. In these cases, as long as all delinquent FBAR returns are filed with the IRS, the IRS will not likely seek to impose a penalty for failing to disclose the foreign bank accounts.

What are some example where foreign income might not result in U.S. taxation?

1. If a taxpayer establishes a foreign account in which the foreign government does not permit the individual to remove the funds for an extended period of time. These financial accounts are commonly referred to as “blocked accounts.” In such cases, the IRS may defer foreign source income accrued in such account until it is paid to the U.S. taxpayer.

2. A U.S. taxpayer resides, or did reside, in a foreign country. While the U.S. taxpayer resided in a foreign jurisdiction he or she participated in a foreign pension trust that is considered to be a qualified plan for U.S. tax purposes. If the United States had a tax treaty in place with the foreign jurisdiction where the trust was located and the tax treaty contains language that provides relief with respect to the earnings of the pension trust, such treaty language may present a barrier to U.S. taxation in regards to distributions received from the foreign trust.

3. The U.S. taxpayer has a joint account with a foreign alien and the account is located in a foreign country. All the assets belonging in the account were provided by the alien. In such a case, a position could be taken that the foreign source taxable income should be assigned to the foreign alien and not the U.S. taxpayer.

Can the IRS Assess a Penalty against a U.S. Taxpayer who Mistakenly Failed to Disclose a Foreign Bank Account?

If a U.S. taxpayer innocently or mistakenly failed to properly disclose a foreign account, the maximum penalty is $10,000, per year, per account. However, this penalty can be removed or abated for reasonable cause.

Serious considerations must be taken into account when deciding to participate in the OVDP. To receive the best legal advice, contact us today so we can begin the important job of protecting you and your assets. We will explain all your options then help you to craft the best possible strategy before making any disclosure to the IRS or state agency. Our goal will be to avoid criminal prosecution and minimize any payments to the IRS.

For more information on the IRS 2012 Offshore Voluntary Disclosure Program, please refer to this IRS site

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