Life, as the saying goes, is full of choices. For holders of foreign bank accounts, those choices continue to require up-to-date information and an awareness of effective tax strategy.
Offshore account enforcement is a key area of emphasis for the IRS. The agency recently joined with European countries in an agreement to crack down on tax evasion and implement the Foreign Account Tax Compliance Act (FATCA).
The IRS is also poised to scrutinize FBAR filings - the statements required for Report of Foreign Bank and Financial Accounts.
So if you have a foreign account that is not in compliance with these stringent requirements, what should you do? Should you close it? Or would it make more sense to take advantage of the voluntary disclosure program offered by the IRS?
Keep in mind that closing a foreign account that carries past income and reporting obligations doesn't necessarily settle the matter. In fact, those obligations even exist for this year, up until the date that you actually close the account.
To be sure, these past reporting requirements don't carry on indefinitely. But they may remain valid for up to six years - and that's a long time.
Closing an account without disclosing it to the IRS could also potentially trigger criminal charges for tax evasion. Keeping the account and not disclosing it could have this effect as well.
But the voluntary disclosure program offered by the IRS has drawbacks too. For one thing, you're looking at a penalty of 27.5 percent of your highest account balance. On a large account, that is a considerable chunk of change.
In short, decisions about foreign accounts are complex and should be carefully weighed.
Source: "Is Closing Foreign Bank Accounts An Alternative to Disclosure?" Robert W. Wood, Forbes, 4-7-12