Who Says There Is No Such Thing as a Second Chance?

Posted on Categories Tax Law

It has now been several years since the Swiss banking giant UBS found itself in trouble for impeding the IRS and conspiring to defraud the United States. The outcome was a negotiated settlement between the U.S. government and UBS that called for the disclosure of the names of U.S. taxpayers holding money overseas. This result was significant due to the commonly overlooked/ignored filing requirements of U.S. persons that have overseas financial interests.

Any U.S. person who has a financial interest in, or signature authority (or other authority) over, any foreign financial account may have to file a Report of Foreign Bank and Financial Account Form TD.90-22.1 (commonly referred to as an FBAR). The requirement is triggered if the aggregate value of these accounts exceeds $10,000 at any time during a calendar year. Failing to file an FBAR can result in civil and/or criminal penalties. If the failure to file is deemed “willful,” a penalty equal to the greater of $100,000 or 50 percent of the account balance can be imposed for each failure to file. This means that if someone willfully fails to file the form for three years in a row, the penalties can equal an aggregate of 150 percent of the account balances, wiping out the entire account.

Capitalizing on the publicity of an end to Swiss bank secrecy and the severity of the penalties, the IRS offered an amnesty-like voluntary disclosure option for taxpayers to come clean. 

The program required filing amended tax returns and the payment of any tax shown thereon but incentivized compliance by reducing the multiple 50-percent penalties to a single 20-percent penalty.

The program was more successful than expected and the “one-time” opportunity saw its original deadline of June 30, 2010, extended into September and then again to October 15, 2010. Overall, 15,000 voluntary disclosure filings were received by the IRS.

Since the program ended, the IRS reports having received 3,000 more such disclosures by taxpayers hoping to fall within the amnesty’s provisions. On January 24th, BNA reported in their Daily Tax Report that IRS Deputy Commissioner Steven Miller commented that the IRS will be offering a second opportunity for noncompliant taxpayers to cry mea culpa. The terms of this program are unlikely to be more favorable than the first; however, it remains to be seen whether the terms will be harsher than they had been. What is clear, however, is that the program will drive substantial revenues into the federal government.

The next question should be: when will we see a broader-based amnesty to bring taxpayers with ordinary tax problems back into the fold? The government is estimating a 2011 tax gap of $350 billion.  This figure consists of unreported, underreported, and underpaid taxes. A substantial portion of these taxes are owed by “regular” people and small business owners who are unable to become compliant with their tax obligations due to the penalties associated with coming clean. Given the success of the FBAR amnesty program, offering a similar penalty-reduction amnesty to taxpayers with “regular” tax problems would certainly drive additional revenue into the federal government.

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