As the IRS sharpens its focus on offshore financial accounts, a government program is urging owners to voluntarily disclose unreported accounts and payments to foreign persons. In a recent WebCPA article, Lewis Kevelson, a Partner in MarcumRachlin€s Tax and Business Services Division, takes a look at the IRS initiatives to gain knowledge and what they mean for taxpayers.
The IRS is increasing its audit activity involving payments to foreign persons and U.S. taxpayers offshore financial accounts. Businesses may be surprised by the review of payments which will focus primarily on accounts payable to determine if any payments to foreign individuals or foreign companies should be subject to a 30% withholding tax.
The Agency's focus on offshore financial accounts (primarily Swiss accounts with UBS) has been the subject of recent media attention. In connection with its on-going investigation, the IRS is giving taxpayers an opportunity to avoid criminal prosecution by voluntarily disclosing unreported offshore accounts by September 23, 2009.
The first initiative, called the "accounts payable sweep," focuses on a company's vendor list and whether the company is properly withholding taxes on payments to foreign persons. In general, a payment to a foreign individual or a foreign company is subject to a flat 30% withholding tax.
The IRS plans to scrutinize payments for directors' fees, licensing fees, rents, royalties, interest, prizes, awards and services rendered by foreign individuals, professional services firms and corporations. The Agency will also review payments made to foreign persons for dividends and interest.
The IRS has given its examining agents detailed procedures in its Internal Revenue Manual (IRM). Because the IRM is a public document, companies should be able to identify problem areas and take corrective action to reduce exposure, including putting procedures in place to comply with IRS requirements for offshore payments.
The second IRS initiative focuses on U.S. taxpayers (individuals, companies, trusts, partnerships, not-for-profits) that have not reported ownership, signature authority or control over offshore financial accounts. The IRS defines a "financial account" as any bank, securities, securities derivatives or other financial instruments account. The term includes any savings, demand, checking, deposit or other account maintained with a financial institution or other person engaged in the business of a financial institution.
The IRS is giving taxpayers an opportunity to come forward voluntarily and disclose unreported accounts. The program enables taxpayers, who may have exercised poor judgment, to get into the IRS system without facing criminal charges. It imposes certain penalties and requires taxpayers to pay tax and interest on the unreported income.
As part of the voluntary disclosure program, the IRS looks back six years (2003-2008) and requires taxpayers to file or amend their income tax returns to disclose unreported income.
The IRS will assess all taxes and interest due for the six years, plus an accuracy or delinquency penalty. Another penalty is added, equal to 20% of the highest aggregate account balance(s) for the six-year period.
In some cases, the voluntary disclosure program may not be the best option. For example, taxpayers who have properly reported and paid taxes on income from the offshore accounts but failed to file the Form TD F 90.22-1 are advised by the IRS not to participate. Instead, the IRS explains that such taxpayers will not be penalized if they properly file Form TD F 90.22-1 and attach a statement explaining why the report or reports are late.
Given the complexity and potential hazards of voluntary disclosure, taxpayers are advised to consult an attorney specializing in international tax issues.
