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FBAR Penalties Reduced for Six Months - IRS Voluntary Disclosure Framework
Other Civil Penalties and Criminal Penalties Will Not Apply
IRS recently provided a framework for voluntary disclosure requests regarding offshore issues,
such as previously undisclosed foreign financial accounts and entities, (March 23, 2009 IRS
memo to LMSB and SBSE, see March 26, 2009, IRS Commissioner statement at
http://www.irs.gov/newsroom/article/0,,id=206014,00.html). This IRS policy is in place for six
months until September 23, 2009. Taxpayers making voluntary disclosures of offshore non-
compliance can avoid many penalties that would otherwise apply, such as the account balance
FBAR non-disclosure penalty provisions, and other provisions pertaining to various information
returns including Form 926, Form 3520, Form 3520-A, Form 5471, Form 5472 and Form 8865.
Depending upon the facts in a given case, these penalties can cumulatively amount to far more
than the total value of the offshore assets. IRS is promising not to pursue criminal penalties and
to only impose limited civil penalties.
Consistent Basis for Resolving Cases
To assure consistency of treatment of these cases, the IRS has centralized the review and
processing of voluntary disclosures with offshore aspects in one office in Philadelphia, which is
authorized under the March 23 memo to resolve cases on the following basis:
(1) Assess all taxes and interest going back six years. Require the taxpayer to file or amend all
returns, including information returns and Form TD F 90-22.1, Report of Foreign Bank and
Financial Accounts, commonly known as “FBAR”.
(2) Assess either an accuracy or delinquency penalty on all years (no reasonable cause exception
may be applied). And,
(3) In lieu of all other penalties that may apply, including FBAR and information return
penalties, IRS will assess a penalty equal to 20% of the amount in foreign bank accounts/entities
in the year with the highest aggregate account/asset value.
Reduced 5% Penalty For Special Circumstances
Under special circumstances, the 20% penalty is reduced to 5%. These are:
(a) The taxpayer did not open or cause any accounts to be opened or entities formed,
(b) There has been no activity in any account or entity (no deposits, withdrawals, etc.) during the
period the account/entity was controlled by the taxpayer, and
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(c) All applicable U.S. taxes have been paid on the funds in the accounts/entities (where only
account/entity earnings have escaped U.S. taxation).
Submit Voluntary Disclosures to IRS Local Special Agent for Criminal Investigations
Voluntary disclosures should be submitted to the local Special Agent in Charge of IRS Criminal
Investigations, who will verify that the disclosures are timely and refer them to an IRS examiner
for civil settlement under the new guidelines.
To benefit from this policy, taxpayers must make voluntary disclosure requests and fully
cooperate with the IRS, both civilly and criminally.
Taxpayers Should Consult CPAs
It is essential for taxpayers with unreported income to retain someone (usually a CPA) to help
them determine the full extent of the potential tax and penalties that the IRS could impose before
making an disclosures to the IRS. And it is suggested that an attorney should be retained to hire
the accountant(s) under an agreement that protects the taxpayer's right to not incriminate
himself/herself. The accountant should be familiar with the tax rules that apply to U.S. persons
who own foreign entities, investments or have transferred assets to foreign trusts.
For more information and AICPA resources on the FBAR, click here. There is also more
information and links about the 2009 voluntary compliance initiative compiled by one of the
AICPA International Tax TRP members at http://www.vernonjacobs.com/voluntary-