FBARs and not-yet-reported offshore income: penalties and practitioners' issues.

• Author: Sullivan, Neil A.J.
• Position: Report of Foreign Bank and Financial Accounts

This item considers (1) options available for the client that did not disclose under the IRS's voluntary disclosure program, which ended October 15, 2009; (2) practitioners' responsibilities, including tax organizers and engagement letters; and (3) items suspended and/or extended to the June 2010 due date.

Is it too late to initiate a voluntary disclosure under the IRS program for unreported offshore income and foreign bank and financial accounts? If a client asks for a recommendation, what are the options?

As of this writing, the IRS has released little in the way of new guidance. The IRS has warned taxpayers that full penalties will be assessed against those who did not disclose the underreported income or who did not file Forms 5471, Information Return of U.S. Persons with Respect to Certain Foreign Corporations, or 8865, Information Return of U.S. Persons with Respect to Certain Foreign Partnerships, by October 15, 2009 (see IRS, "Voluntary Disclosure, Questions and Answers," www.irs.gov/newsroom/ article/0,,id=210027,00.html). The IRS said penalty computations could be 50%-70% or even the full balance of the account for which Treasury Forms TD F 90-22.1, Report of Foreign Bank and Financial Accounts (FBARs), were not previously filed and for which income was underreported, thus creating an income tax violation.

However, the IRS has also said that it always encourages taxpayers to come forward and disclose unreported income and is always willing to talk to taxpayers about negotiating a voluntary compliance agreement, even if no formal IRS voluntary program exists. In addition, if there is no unreported income--just the failure to file an FBAR return--the IRS might not assess penalties for the late FBAR because all income has been reported. If appropriate, consider requesting abatement of penalties for reasonable cause.

The IRS expanded audit resources in 2009 and plans to do more audits in 2010. International/offshore bank accounts and credit cards are an egregious area of noncompliance, according to William Marshall, IRS director of examinations, North Atlantic Region, at a recent IRS/NY State Society of CPAs joint symposium (September 29, 2009). Fiscal year 2010 examination strategies include 44,000 audits in this region (23,000 field and 21,000 office audits).

Consider the preparer due diligence requirement and the impact of the tax return preparer review recently announced by IRS Commissioner Douglas Shulman. Circular 230 outlines...