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Internal Revenue Service Amnesty Program

Internal Revenue Service Amnesty Program

The I.R.S. has announced an amnesty program that allows U.S. citizens and residents to avoid criminal prosecution and reduce civil penalties for unreported offshore accounts.

Many Americans have offshore accounts with banks and other financial institutions. While it is legal to have offshore accounts, a person must report all accounts over $10,000.00 to the I.R.S.. The reporting requirements include the yearly filing of Report of Foreign Bank and Financial Accounts, Form 90-22.1 (also known as FBAR). In addition, the personal income tax return Form 1040 requires disclosure of foreign accounts over $10,000.00. Failure to file the FBAR, if done willfully, is a crime punishable by imprisonment of up to five years, or under certain circumstances, ten years (31 U.S.C. $ 5322). Each year the FBAR is not filed, constitutes a separate crime.

This willful failure to disclose the foreign account on the personal income tax return can result in imprisonment up to three years as a false statement on the return in violation 26 U.S.C. $ 7206.

In addition to the criminal punishment of imprisonment and criminal fines up to $500,000.00, the I.R.S. also has significant civil penalties which range from $10,000.00 per violation for non-willful violations, to $100,000.00 or 50 percent of the amount in the account at the time of the violation for a willful failure to file the FBAR.

Since each year is a separate violation, the amount of the civil penalties can be staggering. These civil penalties may be only part of the account holders problem if the yearly earnings on the account were not disclosed on the tax returns. Civil penalties may be as high as 75 percent of the unpaid tax on the unreported income, together with the 50 percent additional interest penalty.

Faced with potential incarceration and massive financial penalties, a person should seriously consider the I.R.S. amnesty program that was announced on March 23, 2009. Under the amnesty program, a person must file FBAR's and amended returns for the last six years and pay tax on the unreported income. In addition, there will be an accuracy or delinquent penalty on all years, together with a penalty equal to 20 percent of the amount in foreign accounts in the year with the highest aggregate value. Under certain circumstances the penalty will be reduced to 5 percent of the highest amount in the foreign account.

A comparison of the civil penalties and taxes under the amnesty program with the penalties and taxes that a taxpayer could be facing if the I.R.S. discovers the existence of a foreign account reveals that serious consideration should be given to taking advantage of the amnesty program which is scheduled to end on September 23, 2009.

The financial benefit of the amnesty program can be seen in this hypothetical example:

A foreign bank account was opened with $250,000.00 in 2000, earning 5 percent per year. No taxes were paid on the $250,000.00 in 2000 when it was earned. Under the amnesty program, the person must file amended returns for the last six years. The income taxes, delinquency penalties and penalties for not filing the FBAR, total approximately $113,000.00 with an assumed tax rate of 33 percent.

Without the amnesty program, the taxes will be assessed from the opening of the account, the civil fraud penalty will probably be imposed and the FBAR penalties will be imposed at the rate of 50 percent for each year. The approximate total of taxes and penalties will, without the amnesty program, be $1,680,000.00.

According to the Commissioner of the I.R.S. the amnesty program is designed to offer Americans an opportunity to "come clean" with the government. This opportunity not only avoids huge civil penalties, but also the potential conviction of a crime and imprisonment.

The I.R.S. amnesty program requires the utmost care in preparing the required returns and FBARs. Contacts with the I.R.S. should be through a representative. Because of the possibility of criminal prosecution, if the terms of the amnesty program are not properly complied with, that representation should be by an attorney experienced in the defense of criminal tax matters.

For more information, visit the section on Federal Criminal Tax Evasion on our website.