Tax Evasion: Crackdown on Overseas Accounts
Business + Economy

Tax Evasion: Crackdown on Overseas Accounts


For most Americans, this year's income tax deadline has come and gone. But another important deadline is coming soon for people who had large amounts of money stashed abroad last year.

Welcome to "FBAR," shorthand for a report of foreign bank and financial accounts required to be filed to the U.S. Treasury Department. Although the requirement has been around for several decades, the Internal Revenue Service and other government officials have been paying more attention to it as part of a growing crackdown on offshore tax evasion. Hundreds of thousands of individuals and businesses who had more than $10,000 in foreign accounts at any time during 2009 must file this form with the government. It must be received on or before June 30. There are no extensions, although the report can be amended if additional information becomes available.

Although taxpayers are required to report income from foreign bank accounts on their tax returns each year, IRS officials say FBAR reports can provide valuable leads in trying to spot and track illicit funds or unreported taxable income. Officials also say the reports can provide useful information for fighting money laundering and other crimes.

There can be "very stiff" criminal and civil penalties for those who fail to file, or who file a false report, says Bryan Skarlatos, a partner at the law firm of Kostelanetz & Fink in New York City and former head of the civil and criminal tax penalty committee of the American Bar Association's tax section. But he says the penalties vary widely depending on whether the violation is deemed to be willful or just plain negligent.

Minding the Tax Gap
The crackdown is part of a major campaign to shrink the nation's estimated $290 billion tax gap, or the difference between what taxpayers pay each year and what the IRS thinks it should be collecting. Nobody knows precisely how much revenue is lost each year due to offshore tax evasion. But Sen. Carl Levin, the Michigan Democrat who heads the U.S. Senate Permanent Subcommittee on Investigations, has estimated that "offshore tax abuses" cost the U.S. Treasury an estimated $100 billion each year in lost tax revenues. That includes $40 billion to $70 billion from individuals and $30 billion to $60 billion from corporations, he said.

In recent years, it has become increasingly dangerous for U.S. tax cheats to rely on foreign bank secrecy laws to hide taxable income. "More and more former bank secrecy jurisdictions have agreed to adopt the international tax standards on information exchanges,” IRS Commissioner Doug Shulman said recently.   “In the U.S. and other nations, we view offshore tax evasion as an issue of fundamental fairness. Wealthy people who unlawfully hide their money offshore aren’t paying the taxes they owe, while schoolteachers, firefighters and other ordinary citizens who play by the rules are forced to pick up the slack."

The rules for reporting foreign accounts can be complex. In general, each "United States person," such as a citizen or resident of the U.S., "may be required" to file if that person had "a financial interest" in, or signature or some other authority over one or more accounts in a foreign country, and if the total value of all foreign financial accounts exceeded $10,000 at any time during the calendar year, according to the IRS. Also, the account must be reported whether or not it generates income.

The FBAR isn't intended to be filed with your income tax return, which was due April 15 unless you got an extension, as millions of taxpayers do each year. The requirement is in addition to the reporting and tax payment rules for an income tax return. Schedule B of Form 1040, or Form 1040A for 2009, line 7a asked: "At any time during 2009, did you have an interest in or a signature or other authority over a financial account in a foreign country, such as a bank account, securities account, or other financial account?”

Tom Herman is a former reporter for The Wall Street Journal.