The IRS issued press release IR-2011-14 (Feb. 8, 2011) which announces the opening of a new program for the voluntary disclosure of foreign bank accounts with filing of back taxes and delinquent foreign bank account reports for the past eight years. The press release summarizes the highlights of the program and also links to a more detailed Q&A. The press release can be found here and the Q&A could be found here. As suggested by the IRS previously, the new program has stiffer penalty rules. OVDI requires individuals to pay a penalty of 25% of the amount in the foreign bank accounts in the year with the highest aggregate account balance covering the 2003 to 2010 time period. There are reduced penalties for some eligible taxpayer of 5 or 12.5%. Taxpayers will also have to pay back-taxes and interest for up to 8 years. All of this is obviously more stringent compared to the 2009 program’s 20% penalty and 6 year look-back (2003-2008). Taxpayers will have to enroll in the program by August 31st in order to be able to benefit from the potential avoidance of criminal liability and higher civil penalties. U.S. resident taxpayers with assets in Italy or other foreign countries, and U.S. citizens residing abroad and in Italy should pay attention to the new program, which may offer opportunities to rectify previous mistakes or omissions and be back in compliance with substantially reduced penalties.
In connection with the enactment and operation of its (third) tax shield (a special program of voluntary disclosure of foreign investments and earnings), due to elapse on April 30, 2010, Italy is reinforcing its rules on reporting foreign assets on Italian tax returns.
With Circular n. 43/E of October 10, 2009, Italy's tax administration adopted a new guideline according to which all foreign assets must be reported on the special R-W section of the Italian tax return, including those assets which currently do not generate any foreign source earnings taxable in Italy, but are potentially able to generate such earnings in the future.
On February 1, the Italian tax administration approved the new income tax return forms for 2010 (for individuals and unincorporated business) and issued instructions for the preparation of the return that confirm the above guideline.
As a result, from tax year 2010 all assets held abroad must be declared on the Italian tax return, including personal assets which do not produce any income such as foreign vacation homes, yachts, jewelery, art collectibles. Previously, only foreign assets which actually generated foreign source income taxable in Italy (such as foreign bank accounts and financial instruments) had to be reported.
Compared to the United States and other countries, Italy operates very sophisticated rules on reporting foreign investments. The obligation to disclose foreign assets is set forth in article 4 of legislative decree n. 167 of 1990, according to which "foreign investments which may generate foreign source income taxable in Italy must be reported on tax return".
Foreign assets are reported on section RW of the income tax return. Section RW is divided in three parts. Part I includes any transfer of money from Italy to a foreign country made in connection with a reportable foreign investment. Part II included foreign to foreign transfers connected with reportable foreign investments. Part III includes the value of foreign assets held at year end.
Penalties for failing to report have been increased and can be assessed between a minimum of 10 up to a maximum of 50 percent of the value of unreported foreign assets. Also, all unreported foreign assets are deemed to originate from unreported taxable income and penalty for failing to report income and pay tax on it can be assessed from a minimum of 100 to a maximum of 400 percent of the unpaid tax.