In a previous article, we discussed the obligation of all U.S. citizens to report bank accounts they hold outside the U.S. (FBAR) annually to U.S. authorities if the accounts had a combined balance exceeding \$10,000 on any day of the year. Offshore bank accounts have become one of the hottest issues U.S. tax lawyers have dealt with in recent years, as the penalties for failing to report accounts are particularly high.
It all started with Swiss banks, specifically UBS, which was accused of encouraging U.S. citizens to maintain secret accounts in Switzerland without paying taxes on the interest earned. After a lengthy investigation by U.S. tax authorities, the U.S. government reached a settlement with UBS, which turned over information on Americans with Swiss accounts and paid a \$780 million fine. Bradley Birkenfeld, a former UBS employee who provided information to U.S. tax authorities, received a \$104 million reward from the U.S. government. Today, the Foreign Account Tax Compliance Act, known as FATCA, requires banks operating outside the U.S. to identify any Americans holding accounts and report their information to U.S. authorities. The impact of FATCA has reached Greece as well—recently, Greek banks have begun asking customers with ties to the U.S. whether they are subject to American tax laws. U.S. authorities hope FATCA will ultimately compel Americans to report their accounts as required.
Many people, however, for various reasons, have not filed their annual FBAR reports. U.S. law provides for criminal penalties and imprisonment of up to five years for failure to file FBAR, as well as civil penalties up to 50% of the maximum balance in each account for each year not reported. This means penalties can exceed the account balance if reports are missing for multiple years.
To assist those who were not compliant in the past, the U.S. government created an amnesty program, first in 2009, then in 2011, and finally in 2012. This amnesty shields participants from criminal or administrative penalties related to FBAR non-filing, provided that (1) the applicant entered the program before being targeted by U.S. authorities; (2) the applicant now makes truthful reports for prior years; and (3) the applicant pays an administrative penalty equal to 27.5% of the highest balance of unreported foreign accounts. (In some cases, the penalty may be lower.) Those who filed honest tax returns and paid taxes but failed to report foreign accounts are exempt from this penalty and do not need to use the amnesty program.
For many, especially those living outside the U.S. who were not compliant with their account reporting obligations, a 27.5% penalty on their deposits seems excessive. After years of protests from thousands of outraged Americans abroad, the U.S. government announced it would show greater leniency toward Americans residing permanently overseas whose non-compliance was “non-willful.” Thus, Americans in this category can file late reports without risking the harsh penalties otherwise imposed by U.S. law.
