U.S. citizens and residents are taxed on their worldwide income. Some taxpayers, however, fail to include income from assets and accounts held overseas. The government is cracking down on such taxpayers by working with foreign banks to discover the names of depositors. Taxpayers found with undisclosed foreign accounts can be heavily penalized.
There are two distinct reporting requirements for taxpayers; there may be some overlap but both reports are required if taxpayers meet the applicable thresholds:
Filing thresholds. When reporting is required depends on the amount of foreign assets or accounts. A report on foreign accounts is required if they hold in the aggregate more than $10,000.
The reporting threshold for FATCA depends on filing status and whether the taxpayer is living within the U.S. or abroad.
Taxpayers required to file returns for foreign assets and accounts but who fail to do so can be penalized. The penalties are:
In an effort to get taxpayers to come forward and disclose their foreign accounts before the IRS finds out about them, there is a special program that can be used to minimize penalties. Early in January 2012, the IRS announced a third offshore voluntary disclosure program; one program ran in 2009 and another in 2011. This new program has no deadline for participation. The IRS collected $3.4 billion from the first program and thus far $1 billion from the second program; it hopes the new program will be equally successful from a revenue perspective.
To qualify for the program, a taxpayer must:
Taxpayers who have not yet disclosed their foreign accounts should discuss their situation with a tax professional, who can determine whether participation in the new program is advisable.
Taxpayers and businesses spend about 7.6 billion hours a year complying with tax-filing requirements (the equivalent of about 3.8 million employees working full time for one year).
Source: 2008 Annual National Taxpayer Advocate Report.View all factoids