Friday’s Tax Quote – October 30, 2009

Today’s quote comes from Bruce the Tax Guy over at the quality tax law blog lrtaxprep.com.

"Too bad that all the people who know how to run the country are busy driving taxicabs and cutting hair."

- George Burns

Back in November 2008, Bruce compiled an anthology of tax quotes that you can read by clicking here.

The Best Tax Advice Ever

Recently, I began writing a regular tax column for the Wisconsin Law Journal (a fine publication). In the most recent article, I explained the two practical practices that I believe have the largest impact on the success of a business and the ability to deal with unexpected tax issues. The article can be found here: The Best Tax Advice

Friday's Tax Quote - October 23, 2009

"Only God knows where we got our tax system."

-Sam Gibbons

Friday's Tax Quote - October 16, 2009

"Death and taxes are inevitable."

- Thomas Chandler Haliburton

Friday's Tax Quote - October 9, 2009

"Cursed war and racking tax
Have left us scarcely raiment to our backs."

- Sir Walter Scott

Friday's Tax Quote - October 2, 2009

"Taxes send messages, and in several ways. They affect the costs and returns to different kinds of activity, thereby influencing patterns of use of capital and labor. They also make statements about the relative desirability of different types of activity and patters of conduct. Conduct that carries a low tax induces people to emulate that conduct. Conduct that carries a high tax discourages such conduct."

- Edward K. McCaffery and Richard E. Wagner

What is the Voluntary Disclosure Program?

Many taxpayers are coming forward to disclose foreign financial accounts in an effort to avoid the harsh penalties associated with failing to file the FBAR tax form. The IRS is applying a reduced penalty structure to those that make a "Voluntary Disclosure" of these foreign financial accounts by October 15, 2009.

But what exactly is a Voluntary Disclosure? The IRS has provided a number of Q & A's that answer many of the questions that people and business owners may have about the program. Concerning the nature of the program, the IRS says:

Q4. What is the IRS’s Voluntary Disclosure Practice?

A4. The Voluntary Disclosure Practice is a longstanding practice of IRS Criminal Investigation of taking timely, accurate, and complete voluntary disclosures into account in deciding whether to recommend to the Department of Justice that a taxpayer be criminally prosecuted. It enables noncompliant taxpayers to resolve their tax liabilities and minimize their chances of criminal prosecution. When a taxpayer truthfully, timely, and completely complies with all provisions of the voluntary disclosure practice, the IRS will not recommend criminal prosecution to the Department of Justice.

[Note: the IRS description focuses on the avoidance of criminal penalties for failing to comply with the tax law. In the context of foreign financial accounts, the Voluntary Disclosure Program also offers a reduced penalty structure.]

What is not made clear in this answer is what it means for a disclosure to be made "truthfully, timely, and completely." Its easy to understand what truthful and complete mean, but what about "timely." When we think about filing a tax return, "timely" means filing by the due date. That is not the case here though. A Voluntary Disclosure is not considered timely just because it is made before the October 15, 2009 deadline.

According to the Internal Revenue Manual Section 9.5.11.9, a disclosure is timely if it is received before:

a. the IRS has initiated a civil examination or criminal investigation of the taxpayer, or has notified the taxpayer that it intends to commence such an examination or investigation;

b. the IRS has received information from a third party (e.g., informant, other governmental agency, or the media) alerting the IRS to the specific taxpayer’s noncompliance;

c. the IRS has initiated a civil examination or criminal investigation which is directly related to the specific liability of the taxpayer; or

d. the IRS has acquired information directly related to the specific liability of the taxpayer from a criminal enforcement action (e.g., search warrant, grand jury subpoena).

So, basically, if a person or business owner is already under the IRS microscope, that person will not be able to make a Voluntary Disclosure because their disclosure will not be considered "timely." As a result, the will not be able to reduce their exposure to penalties for having failed to file an FBAR form.

FBAR Voluntary Disclosure - No Unreported Income

U.S persons having foreign financial accounts are required to report the existence of the account on a Form 90-22.1 (known as an FBAR) if the aggregate value of all such accounts equal or exceed $10,000. The IRS is currently encouraging taxpayers to come forward through its Voluntary Disclosure Program if they have not filed the FBAR forms and have failed to report any taxable income from those accounts.

But what if those foreign accounts have not generated any taxable income? What if any taxable income on those accounts was reported on a tax return?

The answer is that an FBAR form is still required. However, the taxpayer does not have to come forward through the Voluntary Disclosure Program.

Ordinarily the penalties for failing to file an FBAR can be quite severe. The IRS has agreed to waive these penalties in their entirety, however, if the taxpayer has paid all tax due in connection with the foreign accounts but have simply failed to file the FBAR. Moreover, these taxpayers do not need to go through the more elaborate Voluntary Disclosure Program. Instead, they can simply file the past due FBAR forms together with an explanation as to why they were not filed in the first place.

Be careful though, if a taxpayer has not reported all income from the accounts and simply files the FBAR forms without making a truthful, timely and complete disclosure, they can be subjected to the much more severe penalties.

For taxpayers who reported and paid tax on all their taxable income for prior years but did not file FBARs, the IRS says that they:

"should file the delinquent FBAR reports according to the instructions (send to Department of Treasury, Post Office Box 32621, Detroit, MI 48232-0621) and attach a statement explaining why the reports are filed late. Send copies of the delinquent FBARs, together with copies of tax returns for all relevant years, by September 23, 2009, to the Philadelphia Offshore Identification Unit at:

Internal Revenue Service
11501 Roosevelt Blvd.
South Bldg., Room 2002
Philadelphia, PA 19154
Attn: Charlie Judge, Offshore Unit, DP S-611

The IRS will not impose a penalty for the failure to file the FBARs. "

Reporting Foreign Accounts - The Voluntary Disclosure/Amnesty Program

A lot has been said in the news recently about the Internal Revenue Service working with foreign countries (particularly Switzerland) on the disclosure of information concerning U.S. persons owning foreign financial accounts. However, when most people hear these stories, they assume that the government is only interested in those people (or businesses) who have opened foreign accounts in an effort to evade U.S. income taxes.

The fact is, however, that any person or business that has a “foreign financial account” must disclose its existence to the IRS on a Form 90-22.1, commonly known as an FBAR. The FBAR form is due on June 30 of any calendar year and must disclose any foreign accounts if the aggregate balance of all foreign accounts equals $10,000 or more. Even if the person who owns the account reported and paid tax on the income from that account, they must still file the FBAR form.

Failing to file this form can have severe consequences. The failure can result in a $10,000 penalty for each failure to file. Where that failure is considered to be willful, penalties can rise to an amount equal to 50% of the account balances. Therefore, if someone willfully fails to file the form for three years in a row, the penalties can equal an aggregate of 150% of the account balances. Criminal penalties are also possible.

Recognizing that many people may have been unaware of the requirement to report foreign financial accounts, or may not have realized that their holdings constitute foreign financial accounts, the IRS is allowing these U.S. persons to participate in its Voluntary Disclosure Program (essentially an amnesty program). The program allows taxpayers to disclosure the foreign accounts, pay any tax related to those accounts and reduce the amount of penalties that will be imposed.

Unfortunately, however, this Voluntary Disclosure Program (i.e. amnesty) is only available with the reduced penalty structure for a limited amount of time. On September 21, 2009, the IRS extended the deadline for participating in the Program until October 15, 2009. By having done so, the IRS hopes to increase the number of taxpayers that come forward through the Voluntary Disclosure Program.

This was certainly good news for taxpayers who were attempting to comply with the Program but were scrambling to get the materials necessary together before the amnesty expires. Perhaps the extended deadline also gives additional taxpayers time to realize that their foreign holdings may constitute foreign accounts that are reportable on the FBAR form. For information on this Voluntary Disclosure Program, you can visit the IRS website by clicking here or return to this blog for future posts discussing the various aspects of the FBAR Voluntary Disclosure Amnesty Program.