Since 2009 the IRS campaign against unreported income and undisclosed foreign accounts has morphed from a focus on Swiss banks and large accounts to a kind of everyman’s tax disclosure. But keep in mind that just like when the net is lowered into the water it catches all sizes of fish – the IRS states no undisclosed foreign account is too small to avoid penalties. Many people have problems sleeping because of Foreign Account Tax Compliance Act (FATCA) and the filing requirements of Foreign Bank Account Reporting (FBAR).
FATCA was enacted in 2010 and the IRS has touted that FATCA has been successful so far. The IRS states they have collected US$6.5 billion and they reasonably believe that as much as $100 billion per year could be collected. The IRS is working with other countries that would like to use the U.S. model to improve their tax collection. The IRS will be working closely with the Organization for Economic Cooperation and Development (OECD) to implement Global FATCA (what many people are now calling GATCA); and also that the forms to request information from financial institutions would be standardized so that all countries would use the same forms, making it easy on the financial institutions. The IRS reasonably believes that FATCA can work, and given that the law has the effect of forcing compliance by every country, ultimately, everyone will benefit.
Keep in mind that an FBAR is different from FATCA and the requirements are also different. While impact of FATCA is to report you foreign income on your U.S. income tax returns, FBAR is an informational submission that must be filed with the Treasury Department if you have more than $10,000 in financial assets overseas. So, for FATCA, the financial institutions and the foreign governments will report to the IRS directly, but for FBAR, the taxpayers must self-report to the United States Treasury Department by June 30th each year.
Sure, there are thresholds, including the rule that you don’t need to file annual FBARs if you have $10,000 or less in your accounts. But remember, that is in the aggregate, so having three accounts with $4,000 each puts you over.
Plus, the $10,000 ceiling is judged every single day of the year. If you ever go over $10,000 in the aggregate at any point during the year, you must file. Remember too that even this FBAR threshold isn’t applicable to income taxes. If small accounts produce income, you must report it.
Say you have a foreign account with $8,000 at all times during the year, and it produces $400 of interest income. Even though the account isn’t subject to FBAR rules, you must report the income. And most foreign banks don’t send you handy Form 1099-type reminders at tax time.
Even if your undisclosed foreign bank account is small, if you fail to file FBARs and/or fail to report income, you could go to jail or face huge fines or penalties. The IRS has made clear that non-compliant accounts—and there’s no threshold for what accounts are too small to ignore—can be dealt with severely.
FBAR penalties can be enormous, a civil penalty of $10,000 for each non-willful violation. If your violation is willful, the penalty is the greater of $100,000 or 50% of the amount in the account for each violation. Each year you didn’t file is a separate violation.
Criminal penalties are even more frightening, including a fine of $250,000 and 5 years of imprisonment. If the FBAR violation occurs while violating another law (such as tax law, which it often will) the penalties are increased to $500,000 in fines and/or 10 years of imprisonment.
Consider Whether Your Delinquency Is Only In Taxes, Only FBARs Or Both.
Where The Delinquency Is FBAR’s Only –
For such cases you could be entitled to an FBAR Penalty Abatement. Perhaps you properly relied on the advice of professionals in not filing the FBARs or you reasonably did not know you had a filing obligation. By showing “reasonable cause” you may be able to abate the FBAR filing penalties. While the reasonable cause cases generally arise under the income tax laws and regulations, established under the Internal Revenue Code, FBAR penalties are assessed under the Bank Secrecy Act, which is part of the USA Patriot Act. Nevertheless we have found that precedent set forth in the tax cases may help in supporting reasonable cause to abate FBAR penalties.
Where The Delinquency Is FBAR’s AND Taxes –
You need to consider whether your non-compliance could be deemed willful by the IRS. Non-willful conduct is conduct that is due to negligence, inadvertence or mistake, or conduct that’s the result of a good-faith misunderstanding of the requirements of the law. The application of this standard will vary based on each person’s facts and circumstances so it is something that has to be evaluated on a case-by-case basis.
For Non-willful Delinquencies – The Streamlined Procedures are classified between U.S. Taxpayers Residing Outside the United States and U.S. Taxpayers Residing in the United States.
Both versions require that taxpayers:
a. Certify that the failure to report the income from a foreign financial asset and pay tax as required by U.S. law, and failure to file an FBAR (FinCEN Form 114, previously Form TD F 90-22.1) with respect to a foreign financial account, resulted from non-willful conduct. Non-willful conduct is conduct that is due to negligence, inadvertence, or mistake or conduct that is the result of a good faith misunderstanding of the requirements of the law.
b. File 3 years of back tax returns reflecting unreported foreign source income;
c. File 6 years of back FBAR’s reporting the foreign financial accounts; and
d. Calculate interest each year on unpaid tax.
In return for entering the streamlined offshore voluntary disclosure program, the IRS has agreed:
a. Possible waiver of charges of criminal tax evasion which would have resulted in jail time or a felony on your record;
b. Possible waiver of other fraud and filing penalties including IRC Sec. 6663 fraud penalties (75% of the unpaid tax) and failure to file a TD F 90-22.1, Report of Foreign Bank and Financial Accounts Report, (FBAR) (the greater of $100,000 or 50% of the foreign account balance); and
c. Possible waiver of the 20% accuracy-related penalty under Code Sec. 6662 or a 25% delinquency penalty under Code Sec. 6651.
For U.S. Taxpayers Residing Outside the United States who apply to the streamlined program, the IRS is waiving the OVDP penalty.
For U.S. Taxpayers Residing in the United States who apply to the streamlined program, the IRS is imposing a 5% OVDP penalty (applied against the value of the undisclosed foreign income producing accounts/assets).
Now If You Believe That The IRS Would Deem You Willful – The 2014 Offshore Voluntary Disclosure Program (OVDP) is a voluntary disclosure program specifically designed for taxpayers with exposure to potential criminal liability and/or substantial civil penalties due to a willful failure to report foreign financial assets and pay all tax due in respect of those assets. OVDP is designed to provide to taxpayers with such exposure (1) protection from criminal liability and (2) terms for resolving their civil tax and penalty obligations.
OVDP requires that taxpayers:
• File 8 years of back tax returns reflecting unreported foreign source income;
• File 8 years of back FBAR’s reporting the foreign financial accounts;
• Calculate interest each year on unpaid tax;
• Apply a 20% accuracy-related penalty under Code Sec. 6662 or a 25% delinquency penalty under Code Sec. 6651; and
• Apply up to a 27.5% penalty based upon the highest balance of the account in the past eight years. This is referred to as the “OVDP Penalty”.
In return for entering the offshore voluntary disclosure program, the IRS has agreed not to pursue:
• Charges of criminal tax evasion which would have resulted in jail time or a felony on your record; and
• Other fraud and filing penalties including IRC Sec. 6663 fraud penalties (75% of the unpaid tax) and failure to file a TD F 90-22.1, Report of Foreign Bank and Financial Accounts Report, (FBAR) (the greater of $100,000 or 50% of the foreign account balance).
What Should You Do?
Remember small amounts and small accounts may not raise the same kinds of big ticket issues. Nevertheless, there’s no small fry rule at the IRS. Even small amounts of income and account balances can be worth addressing. It’s far better to address these issues than to worry endlessly over not being in compliance with the rules. We encourage taxpayers who are concerned about their undisclosed offshore accounts to come in voluntarily before learning that the U.S. is investigating the bank or banks where they hold accounts. By then, it will be too late to avoid the new higher penalties under the OVDP of 50% percent – nearly double the regular maximum rate of 27.5%.
Don’t let another deadline slip by. If you have never reported your foreign investments on your U.S. Tax Returns or even if you have already quietly disclosed or you are in the 2012 Offshore Voluntary Disclosure Initiative (“OVDI”), you should seriously consider participating in the IRS’s 2014 Offshore Voluntary Disclosure Program (“OVDP”). Once the IRS contacts you, you cannot get into this program and would be subject to the maximum penalties (civil and criminal) under the tax law. Taxpayers who hire an experienced tax attorney in Offshore Account Voluntary Disclosures should result in avoiding any pitfalls and gaining the maximum benefits conferred by this program.
Protect yourself from excessive fines and possible jail time.
Original Post By: Jeffrey Kahn