We’re now well into the amnesty procedure for undisclosed foreign bank accounts, with a little under two months left to go until the September 23 deadline. Here’s where things stand.
The amnesty process is nominally for people who have undisclosed foreign bank and other financial accounts, and who have unreported income from those accounts. The IRS wants to know about the accounts, and wants you to pay tax on the unreported income.
The years in question are 2003 through 2008. Anything that happened before 2003 is ancient history. If you go through the amnesty process, you don’t have to worry about 2002 and earlier. (Note: this is a very good reason to use the amnesty if you have some Serious Problems buried in those earlier years. Give the IRS its pound of flesh for 2003 through 2008 and avoid problems for 2002 and earlier.)
The amnesty program is a package deal. You take or leave it as a package:
– pay the tax plus 20% of the tax on the unreported income for 2003 through 2008.
– pay interest on that “tax plus 20% of tax” for 2003 through 2008.
– pay 20% of the high balance in your undisclosed account at any time during the 2003 – 2008 time frame as a penalty for not filing the Form TD F 90-22.1.
The amnesty package promises no criminal tax prosecution if you qualify. You don’t qualify if the money in that undisclosed foreign account came from criminal sources. You also don’t qualify if you start the process and you don’t completely and fully cooperate with the IRS.
Obligatory warning: this is a broad brush overview. There are nuances and details. Do not make any decisions without consulting an experienced tax lawyer.
There are plenty of people who don’t have unreported income. They just screwed up on the tax forms. They didn’t file Form TD F 90-22.1, Form 3520, Form 5471, etc.
The IRS says that these people have until September 23, 2009 to clean up all of those paperwork foot-faults without any penalties.
This group of people will for sure include those who reported the income from the foreign account on their U.S. tax returns, but just never checked the box on the bottom of Schedule B, and never filed Form TD F 90-22.1. They have it easy.
This process will also include people who made a mistake on Form 3520 and Form 5471, as long as these forms don’t trigger additional taxable income.
(Go see the IRS’s revised FAQ, Items 9 and 42 for how to go about this.)
There’s a whole set of people who SHOULD be in the same boat here, but we can’t be sure that they will be treated that way by the IRS. For instance, Swiss banks frequently withheld tax at 35% on interest earned. When a U.S. taxpayer reports that interest income and claims the tax credit, the additional tax liability in the U.S. is usually zero. So the U.S. Treasury didn’t lose any money. (This looks like a FAQ Numbers 9 and 42 situation). But the person didn’t report the income on the original return as filed (This makes it NOT look like a FAQ Numbers 9 and 42 situation).
Another “for instance.” A U.S. citizen living and working abroad can exclude wage income from U.S. taxation up to a certain level. Or if the wage income is taxed in the country of residence, that foreign tax paid can be claimed as a credit against the U.S. income tax. Usually, these people end up with a zero U.S. tax liability. Same problem: they look like they should fit into the FAQ Numbers 9 and 42 situation, but technically they don’t.
What will the IRS do? All of the pronouncements from the IRS that I have heard have been wishy-washy. No willingness to state a definite policy. All of the “in the trenches” IRS agents I have spoken to have told me “Yeah, exactly. I’m not sure of the result either.”
Same problem with people who owe only a few hundred dollars in additional tax on unreported income. You mean to tell me that the government wants 20% of the high balance of the account even if I underpaid my taxes by $200? Yep. That’s the line from the government, as near as I can tell. The amnesty package is a take-it-or-leave-it proposition.
If you’re in one of these positions, you need competent and experienced help to understand your facts, your situation, and your exposure. Then you can decide what to do.
In some cases the amnesty isn’t the best indicated result. The IRS says if you don’t like the amnesty, then go through the regular audit process if you think you’ll have lower penalties.
Good idea in some cases. But this is an uncertain result. Now the IRS isn’t limiting itself to 2003 as the earliest year. And you face the criminal tax prosecution risk, or the civil tax fraud penalty risk. Bigger numbers.
If your situation is on the low-budget side of things, the regular audit might be better. If your situation shades itself towards the “bad dog” behavior, the amnesty is probably better for you.
The IRS has said it will apply the Internal Revenue Manual’s guidelines for FBAR penalties. There is room for interpretation there, but at least it gives you an idea of the penalties that might apply (within a range, at least) if you throw yourself on the tender mercies of a random IRS agent’s careful examination of your foreign account activity.
It’s a hard call. You’re trading certainty (and probably a higher financial cost) for uncertainty (and a possible lower financial cost) in the whole project. What’s more important for you? My experience so far is that people want closure.
If you’re in the “undisclosed offshore account” situation, I think the bias should be towards cleanup during the amnesty — before September 23, 2009 — unless you can find a reason not to. Same goes if you’re in the “Oops I forgot to file my Form 5471” category and similar situations. Gifts from nonresidents? Inheritances from overseas? Does your life touch a foreign trust, corporation, or partnership? Do you have a foreign life insurance policy? Do you own a hedge fund? Etc. All of these things can be cleaned up, possibly at zero penalty cost, during the limited-time amnesty.
I personally think you’re inviting trouble if you launch this process on your own without hiring someone who knows what they’re doing. But I’ve talked to three people so far during this process, one of which has successfully navigated through the Criminal Investigations process on his own, and the other two have launched the process themselves. You might be lucky. Anyway, good luck.
The drop dead date is September 23, 2009. You need to get your amnesty process launched by that date. That means you need to have paper on somebody’s desk at the IRS Criminal Investigations office for where you live. If nothing else, get that letter ready to fax. The FAQ from the IRS gives you guidance on what to put in that letter.