It's no secret that there are few boundaries in the financial world. European banks have branches in the United States. China is America's largest creditor. U.S. taxpayers owe the Internal Revenue Service on all their global income.
What? You say that last one, about your income being taxed regardless of where in the world it comes from, was a secret to you?
The IRS is working to correct that tax misperception while also trying to bring in billions in revenue that's gone uncollected for years. It's allowing people who haven't reported ownership of foreign accounts, or paid taxes on them, to do so now and face reduced penalties for their oversight.
But the deadline is fast approaching. It's Aug. 31.
Harry S. Miller, a partner in the Boston-based law firm Burns & Levinson, notes that the OVDI is at best a partial amnesty. "People coming forward in this program don't get to go home free," says Miller.
Affected taxpayers must check their financial records as far back as eight years (between 2003 and 2010) and pay taxes on income from those undisclosed foreign accounts. Plus, they'll owe interest and, in most cases, a 25 percent penalty on the unreported earnings.
"If you had a foreign account worth $10 million in 2003 when the market was doing well and now it's worth just $5 million, the penalty would be $2.5 million based on 25 percent," says Miller. In essence, you lose half of the current account's value. And don't forget other tax penalties associated with those late filings. "Close to the entire account is gone to the IRS," says Miller.
Then there's the hassle of filing amended tax returns for all those years. And, oh yeah, your tax professional's fees for helping you sort it all out.
Not such a good deal, after all. But consider the alternative. If you don't report the account and the IRS eventually catches you, you'll end up paying even more since the interest and penalties have kept running. You also could face possible criminal prosecution.
Plus, says Miller, your other assets could be at risk: "Your life savings here in the U.S. could be subject to levy or lien."
So who needs to get cracking and report to the IRS by Aug. 31? Anyone who's had a foreign account with $10,000 or more in it at any point during the last eight tax years.
Don't panic if you own shares in, say, T. Rowe Price International Stock Fund. Although the fund manager invests in foreign holdings, the account is held and managed here in the United States. And you and the IRS get a 1099 each year with details of the fund's earnings. So it's not foreign and it's not undisclosed.
If your account is a small one, you also are off the IRS radar. There's a $10,000 annual value threshold for reporting.
But some folks might be surprised to discover they are in the IRS's foreign account crosshairs. Perhaps they set up foreign accounts because they wrongly thought it would save them tax money, says Miller, or they did so to diversify or protect their assets. Others might be innocent account holders, notes Miller, having inherited a foreign account from an overseas relative.
All need to get back in the IRS's good graces ASAP, that is, by Aug. 31.
True, there's not a lot of time left, but the document that needs to be filed, Form TD F 90-22.1, is not hard to complete. All you need is the name and number of the account, location of the bank and its value for the tax years in question. Getting that last figure, however, could be problematic.
"Foreign banks are not very prompt in providing the information," says Miller. "Half is on vacation and the other half is not interested in digging through accounts where secrecy was the main reason for the account in the first place."
Still, says Miller, you should do what you can to show the IRS that you're making a reasonable, good faith effort to comply with the program even if you can't meet all the technical requirements by the deadline.
Miller says the informal word from IRS's criminal division, which is in charge of foreign account investigations, is that if people submit basic information by next week, the IRS may allow them to participate in the disclosure program and provide the complete details as soon as they can.
When the IRS offered a similar deal in 2009 in the wake of the UBS scandal, almost 15,000 U.S. taxpayers confessed their foreign holdings and paid up. The agency is hoping for a similar success rate now.
If you can help the IRS meet or beat that number, it wants to hear from you by Aug. 31. If not, don't be surprised to hear one day from an IRS investigator wielding a bigger tax bill.
Don't miss out on any tax news and tips. Subscribe to Bankrate's free Weekly Tax Tip newsletter.
You also can follow me on Twitter at @taxtweet.