REPORTING REQUIREMENTS FOR CITIZENS WHO OWN FOREIGN ASSETS
Earlier this month, the IRS announced that it would be reopening its Offshore Voluntary Disclosure Program (OVDP), giving taxpayers with unreported foreign assets a third opportunity to come forward, avoid criminal prosecution and report their holdings. The IRS previously offered OVDPs in both 2009 and 2011. There are two key changes to this third OVDP.
First, the penalty under the new program has risen to 27.5%. This penalty is assessed on the highest aggregate balance in foreign bank accounts, entities, or assets during the last eight years. It is important to understand that there is no requirement of intending to hide the foreign account from the IRS for the penalty to apply. Under certain limited circumstances, some taxpayers may be eligible for a reduced penalty of 5% or 12.5%.
The second key change to the new OVDP is that there is no set deadline to apply. Therefore, it is possible that the terms of the OVDP could change. There are concerns that the IRS could increase the penalty or eliminate the program at any time.
General Reporting Requirements for Foreign Assets
As a reminder, anyone owning a foreign account, having signature authority over a foreign account, or possessing an ownership interest in a foreign financial asset may have filing requirements with the IRS in addition to the annual federal income tax return. These filing requirements may include Form TD F 90-22.1 and Form 8938.
Form TD F 90-22.1 (Report of Foreign Bank and Financial Accounts)
The IRS requires that Form TD F 90-22.1 be filed each year that an individual owns one or more foreign accounts with an aggregate balance of $10,000 or more. The Form identifies each foreign account owned and reports the highest balance in each account for that calendar year. It is due on or before June 30th each year.
Form 8938 (Statement of Specified Foreign Financial Assets)
New for 2011, Form 8938 requires certain taxpayers holding specified foreign financial assets with an aggregate value exceeding $50,000 to report information about those assets. Higher asset thresholds apply to U.S. taxpayers who file a joint federal income tax return or who reside abroad. Generally, Form 8938 is due with your annual income tax return.
Given the recent changes and the new Offshore Voluntary Disclosure Program, if you own any foreign accounts or assets, it is extremely important to consult with your tax advisors to ensure proper reporting to the IRS.