Many clients have reported receiving letters from their foreign bank in recent weeks. This is especially true with Swiss banks. Invariably, the letter demands proof that the account holder has properly notified the IRS of their account. What should you do if you receive such a letter?
To best answer this question, some brief background is necessary.
Since 1970, US taxpayers have been required to disclose foreign bank and financial accounts if the aggregate value of those accounts exceeded $10,000 at any time during the year. Reporting is done on the taxpayer’s income tax return (Schedule B) and on a Foreign Bank Account Report (FBAR). Don’t be fooled by the word “bank,” however. Brokerage accounts, CD’s, certain retirement plans, life insurance plans with a cash component, foreign annuities, precious metal accounts and even on-line gaming accounts are included.
Failure to report one of these offshore accounts can land you in hot water with the IRS. Willful failure to file an FBAR is a felony. The chances of going to prison are quite low, however. It’s the civil penalty side of foreign reporting violations that are the most troublesome. Those penalties are often the greater of $100,000 or 50% of the highest historical balance of each unreported account!
In 2010, Congress passed a law called FATCA – the Foreign Account Tax Compliance Act – that requires foreign financial institutions to research their account base and report those with ties to the United States. Although extended twice, most banks must start researching their accounts beginning in July.
As banks ready to report certain accounts to the United States, some banks are sending courtesy letters to their customers advising them that their account will soon be reported.If you received such a letter and have not reported your offshore accounts, take immediate action.
On June 18th, the IRS announced a new foreign tax amnesty program, the 2014 Offshore Voluntary Disclosure Program. Although that program reduces penalties for many taxpayers, the IRS reiterated that they will assess the steep 50% foreign reporting FBAR penalty if they have already received your name from a cooperating bank or if they have issued information requests to that bank. Once the bank discloses your name to the IRS, many of the amnesty options disappear.
Other banks, particularly Swiss banks, are sending letters to taxpayers seeking to determine if you are already in compliance. Should you respond? The answer depends.
If you are already in compliance there is little risk in confirming that you are. Fail to confirm, however, and you may find your account closed.
Some Swiss banks are asking for confirmation so that they can avoid IRS penalties. Complying with their requests helps them, not you. Once again, if you are not in compliance there is no time to lose. Whether or not you respond to the bank’s request likely has little impact on whether the bank ultimately turns over your name to the IRS.
Our advice? Square away your own foreign reporting issues before worrying about the banks.
If you have undisclosed offshore accounts speak with an experienced foreign reporting professional immediately. Not every CPA or tax attorney understands FBAR filings and FATCA compliance. Few do.