If you are in the “fortunate” or “unfortunate” position of having foreign money or specified foreign assets that should have been reported to the U.S. government, but which you have not reported — then you are in a bit of a dilemma, which you will need to resolve before it is too late, especially since the FATCA is in full force.
In addition, it is also very important to ensure that if you are earning any foreign income from that offshore money, that the earnings are being reported on your U.S. tax return.
Those required to file an FBAR who fail to properly file a complete and correct FBAR may be subject to civil monetary penalties. For penalties that are assessed after August 1, 2016, whose associated violations occurred after November 2,2015, the IRS may assess an inflation-adjusted civil penalty not to exceed $12,459 per violation for non-willful violations that are not due to reasonable cause. For willful violations, the inflation-adjusted penalty may be the greater of $124,588 or 50 percent of the balance in the account at the time of the violation, for each violation.
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.
If a taxpayer owes no income tax on his foreign accounts, and he is not under civil audit or criminal investigation by the IRS, and he has not already been contacted by the IRS concerning delinquent FBARs, he should not make a submission to the IRS under the OVDP or the Streamlined Procedures. All he needs do to comply with the law is file his delinquent FBARs.
There are four main methods people/businesses use to get into compliance.
1- The Filing of the delinquent FBARs
Open to Taxpayers who do not have to file delinquent or amended tax returns to report and pay additional tax and
- have not filed a required Report of Foreign Bank and Financial Accounts (FBAR)
- are not under a civil examination or a criminal investigation by the IRS, and
- have not already been contacted by the IRS about the delinquent FBARs
The IRS will not impose a penalty for the failure to file the delinquent FBARs if the taxpayer properly reported on his U.S. tax returns, and paid all taxes.
2- The Streamlined Domestic Offshore Disclosure
The streamlined filing compliance procedures are available to taxpayers certifying that their failure to report foreign financial assets and pay all tax due in respect of those assets did not result from willful conduct on their part.
- Taxpayers must certify that conduct was not willful
- IRS has not initiated a civil examination of taxpayer’s returns for any taxable year
- Taxpayers eligible to use streamlined procedures who have previously filed delinquent or amended returns must pay previous penalty assessments. However, any penalty assessments previously made with respect to those filing will not be abated.
- Taxpayers who want to participate in the streamlined procedures need a valid Taxpayer Identification Number.
Under the Streamlined Foreign, you also have to amend or file 3 years of tax returns (and 8938s if applicable) as well as 6 years of FBAR statements.
This is a highly cost-effective method of quickly getting you into IRS compliance.
The penalty is equal to 5 percent of the highest aggregate balance/value of the taxpayer’s foreign financial assets that are subject to the miscellaneous offshore penalty during the years in the covered tax return period and the covered FBAR period. For this purpose, the highest aggregate balance/value is determined by aggregating the year-end account balances and year-end asset values of all the foreign financial assets subject to the miscellaneous offshore penalty for each of the years in the covered tax return period and the covered FBAR period and selecting the highest aggregate balance/value from among those years.
3- The Offshore Voluntary Disclosure Program
It is generally reserved for individuals and businesses who were “Willful” (intentional) in their failure to comply with U.S. Government Laws and Regulations. Taxpayers choose to enter into this program to avoid criminal prosecution.
Under this program, the Internal Revenue Service wants to know all of the income that was generated under these accounts that were not properly reported previously. The way the taxpayer accomplishes this is by amending tax returns for eight years.
Generally, if the taxpayer has not previously reported his accounts, then there are common forms which were probably excluded from the prior year’s tax returns and include 8938 Forms, Schedule B forms, 3520 Forms, 5471 Forms, 8621 Forms, as well as proof of filing of FBARs (Foreign Bank and Financial Account Reports).
The taxpayer is required to pay the outstanding tax liability for the eight years within the disclosure period – as well as payment of interest along with another 20% penalty on that amount (for nonpayment of tax).
Then there is the “FBAR/8938” Penalty. The Penalty is 27.5% (or 50% if any of the foreign accounts are held at an IRS bad bank) on the highest year’s “annual aggregate total” of unreported accounts (accounts which were previously reported are not calculated into the penalty amount).
When a person is completing the penalty portion of the application, he needs to remember that by entering the program, the applicant is seeking to avoid criminal prosecution.
4- Reasonable Cause statement
While the most common options are described above, there is another alternative. It is called making a Reasonable Cause submission.
With a reasonable cause submission, determined on a Case by Case basis, the attorney will carefully evaluate and analyze the facts and circumstances of your case in detail and assess the pros and cons of the potential submission in order to determine what the benefits and detriments may be to a reasonable cause disclosure. Thereafter the attorney will amend the returns, prepare the necessary forms, and draft a persuasive Reasonable Cause Letter.
The statute of limitations on assessment of an FBAR penalty is six years, and it begins to run on the filing date of the FBAR. It is true that there is no assessment statute of limitations where the taxpayer has committed fraud. But the IRS has the burden of proving fraud, by clear and convincing evidence. Fraud requires proof that the client knew and understood the law, and deliberately failed to follow it. Fraud also requires an element of deceit, dishonesty, or evil motive.
I created this blog to help understand certain basic aspects of U.S. tax law. Of course, each situation is unique and nothing that is on this site will ever replace the expert advice of a tax professional.
Please do not hesitate to contact me should you have any question.
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