Whether the account is with UBS or with a bank in the country of your birth, and even if it was set up by your parents, under the U.S. tax laws, you still are required to report the account and the income therefrom, even if you were completely unaware of the requirement.

Is so, have you failed to report the account on Schedule B of your Form 1040 and/or have failed to report the income from that account on your tax return?  The Internal Revenue Service is now offering individuals a third opportunity to come forward and pay the taxes owed, with a significantly reduced penalty.   The OVDI program is designed to allow individual taxpayers to report previously-undisclosed foreign accounts and income those accounts, while incurring a reduced tax penalty and generally eliminating the possibility of criminal prosecution for failure to disclose. 

Under the current version of the program, in addition to the income tax owed on the unreported income, the standard accuracy penalties, delinquency penalties, and interest on back taxes owed, taxpayers will pay a 27.5% penalty of the highest balance they had in their foreign accounts. While this may not sound like a significantly reduced penalty, consider the following potential penalties for failing to disclose these accounts or disclosing them outside the OVDI:

·         The greater of $100,000 or 50% of the highest aggregate account balance for willfully failing to file a Foreign Bank Account Report (FBAR)

·         A 75% penalty on the amount of tax due for fraudulent underpayment of tax

·         Up to a 40% penalty on the amount of tax due for inaccuracy

·         Criminal charges, including Tax Evasion, Filing a False Return, Failure to File a Return, and Willful Failure to File an FBAR

Please note that there are a few circumstances in which the 27.5% penalty of the highest account balance may be reduced.  If the highest aggregate balance is under $75,000, the penalty is reduced to 12.5%.  The penalty will be reduced to only 7.5% if the taxpayer did not open the account (i.e., someone else opened the account), had minimal contact with the financial institution, and never withdrew more than $1,000 in any year (except when the account was closed).  We are pleased to note that our firm has been successful in assisting taxpayers to a reduced penalty.

The IRS has not provided an end date for this program.  However, the IRS has stated that it can terminate the program at any time and that it can raise the penalties at any time.  Accordingly, if you have a foreign bank account that you previously have not reported to the IRS, the time to act is now.

Under the new regulations, the two-year filing deadline for equitable relief is eliminated.  This allows the individual taxpayer to file an Innocent Spouse equitable relief claim at any time during the statute of limitations, generally within 10 years of the tax assessment.  If the Innocent Spouse claim includes a request for refund, generally the claim must be filed within three years of the date of payment.     

These new regulations specifically include individuals whose Innocent Spouse equitable relief claims previously were denied by the IRS due to the expiration of the then two year limitation.  Individuals in these situations now can reapply for Innocent Spouse relief.