Are you a U.S. taxpayer with foreign accounts or offshore assets? Have you reported all of the income from the foreign accounts or offshore assets on your U.S. federal tax return? Have you filed all required Foreign Bank Account Reports (FBARs) and other foreign reporting information returns, such as the Form 5471 to report ownership of a foreign corporation or the Form 8865 to report ownership of a foreign partnership? Are you in compliance with the FBAR filings and foreign reporting for prior years? Are you aware of the substantial penalty risk and exposure that could apply if you are not in compliance with FBAR filings and foreign reporting for prior years? The late filing penalty is $10,000 USD per form per year for the FBAR and certain foreign reporting information returns such as the Forms 5471 and 8865. The penalty for the willful failure to file the FBAR is the greater of $100,000 USD or 50% of the highest account balance or value per year.
The IRS currently has several amnesty programs available for U.S. taxpayers with unreported foreign accounts and offshore assets. The best available option typically depends on whether the U.S. taxpayer has unreported income from the foreign accounts or offshore assets in addition to delinquent FBARs or other foreign reporting information returns.
Delinquent FBAR Submission Procedures
The IRS will allow U.S. taxpayers to file delinquent FinCEN Forms 114 Report of Foreign Bank and Financial Accounts (FBARs) for prior years without imposing any penalties if all taxable income from the reportable foreign accounts was properly reported on the U.S. federal tax return. To qualify, the U.S. taxpayer cannot be under a current civil or criminal examination by the IRS. This option is not available if the IRS has contacted the U.S. taxpayer regarding the delinquent FBARs prior to being submitted. The reason for filing the FBAR late should be included when the delinquent FBARs are filed. FBARs are not automatically subject to audit under these procedures but they may be subject to audit under the existing audit selection processes that are in place for tax and information returns.
Delinquent Information Return Submission Procedures
The IRS will allow U.S. taxpayers to file delinquent information returns without imposing the $10,000 late filing penalty for Forms 5471 and 8865, etc. if reasonable cause is demonstrated. To qualify, the U.S. taxpayer cannot be under a current civil or criminal examination by the IRS. This option is not available if the IRS has contacted the U.S. taxpayer regarding the delinquent information returns prior to being submitted. The delinquent information returns should be filed with an amended U.S. federal tax return including a reasonable cause statement.
Streamlined Domestic/Foreign Offshore Filing Compliance Procedures
The IRS will allow U.S. individual taxpayers to file six years of delinquent FBARs and three years of amended U.S. federal tax returns with delinquent foreign reporting information returns attached. All of the applicable FBAR and information return late filing penalties and accuracy-related penalties will not be imposed unless the amended returns are selected for audit through the regular audit selection process and the IRS is able to detect fraud on the original U.S. federal tax return and/or the FBAR delinquency was willful. There is a 5% Streamlined Domestic Offshore filing penalty that is based on the highest year’s aggregate balance or value of unreported foreign financial assets as determined at the year end for each year. To qualify, the U.S. individual taxpayer must be able to certify under penalties of perjury that the delinquencies resulted from non-willful conduct. The U.S. individual taxpayer cannot be under a current IRS civil or criminal examination. This option is not available if the IRS has contacted the U.S. taxpayer regarding the delinquencies prior to filing the Streamlined disclosure.
Offshore Voluntary Disclosure Program (OVDP)
The IRS OVDP is designed for U.S. individual taxpayers with foreign reporting delinquencies that involve willful or intentional conduct. The OVDP penalty is 27.5% of the highest year’s aggregate balance or value of unreported foreign financial assets. If the U.S. government has identified the foreign financial institution where the unreported foreign accounts are maintained on a publicized list then the OVDP penalty is increased substantially. A significant advantage of the OVDP is that it protects U.S. individual taxpayers from criminal prosecution for willful FBAR delinquencies which otherwise could result in imprisonment.
U.S. persons are required to file the FinCEN Form 114 Report of Foreign Bank and Financial Accounts (FBAR) to report a financial interest in or signature authority over foreign accounts. There is a $10,000 civil penalty for the non-willful failure to the file the FBAR. The penalty for the willful failure to file the FBAR is the greater of $100,000 or 50% of the balance in the foreign account at the time of the violation. Under the statutory authority for such penalties, the monetary penalty for the willful failure to file the FBAR applies for each year. Criminal penalties such as criminal prosecution and imprisonment also may apply for the willful failure to file the FBAR.
On May 13, 2015, the IRS issued Interim Guidance to IRS employees regarding the procedures for the administration of FBAR penalties. These procedures recognize that IRS examiners have the discretion to determine whether FBAR violations are willful. In most cases, with willful violations over multiple years, the total penalty amount for all years under examination will be limited to 50% of the highest aggregate balance of all unreported foreign accounts during the years under examination. The IRS guidance states the following example to demonstrate the calculation of the penalty.
IRS Example: Assume highest aggregate balances of $50,000, $100,000 and $200,000 for 2010, 2011 and 2012, respectively. The total penalty amount is $100,000 (50% of the $200,000 highest aggregate balance during the years under examination).
Based on these procedures, the 50% penalty is not applied to each year. However, the IRS examiner is allowed to recommend a penalty that is higher or lower than 50% of the highest aggregate balance of all unreported foreign accounts based on the facts and circumstances. The total penalty will not exceed 100% of the highest aggregate balance of all unreported foreign financial accounts during the years under examination.
For non-willful violations, the penalty will be determined for each year based on the aggregate balance of all unreported financial accounts subject to a $10,000 limitation per year. The IRS guidance states that the IRS examiner with certain internal approvals may assert a single $10,000 penalty for one year only in the case of non-willful FBAR violations as warranted under the facts and circumstances. The procedures note that some facts and circumstances may warrant asserting the $10,000 penalty for each year in the case of non-willful violations.
The publication of these IRS procedures may be particularly helpful to U.S. taxpayers in the Offshore Voluntary Disclosure Program who are considering whether to opt out of the OVDP penalty structure.
The U.S. Financial Crimes Enforcement Network (FinCEN) Form 114 is the Report of Foreign Bank and Financial Accounts. The FinCEN Form 114 is commonly referred to as the “FBAR,” which replaces the prior Form TD F 90-22.1. A U.S. person must file an FBAR if the U.S. person has a financial interest in or signature authority over foreign financial accounts and the aggregate highest balance or value of all reportable foreign accounts exceeds $10,000 USD during the calendar year.
A U.S. person has a financial interest in a foreign account if:
Signature authority generally means that the U.S. person has the right to control the disposition of funds or assets in the foreign account with a written or verbal communication to the bank or financial institution which maintains the account.
The due date for the 2014 FBAR is Tuesday, June 30, 2015. The due date of the FBAR cannot be extended. Effective as of July 1, 2013, all FBARs must be filed electronically. The Form 114 is filed through the FinCEN’s BSA E-filing System. Some tax return preparation software applications are compatible to e-file FBARs with the FinCEN.
The highest balance or value of a foreign account during the calendar year must be reported in U.S. dollars on the FBAR. If a foreign account is denominated in a foreign currency, then it is necessary to convert the highest balance or value of the foreign account during the year into U.S. dollars. A specific exchange rate must be used for the currency conversion. Click here to see the required 12/31/2014 exchange rates by country for each foreign currency. The foreign currency is divided by the required 12/31 exchange rate to obtain the highest balance or value of the foreign account in U.S. dollars to report on the FBAR.
A foreign financial account reportable on the FBAR includes, but is not limited to, a checking, savings, demand, deposit, time deposit, securities, brokerage, investment or other account maintained with a financial institution. An account reportable on the FBAR also includes a commodity futures or options account, an insurance policy or annuity with a cash value and shares in a mutual fund or similar pooled fund that is available to the general public with a net asset value and regular redemptions. An account is a foreign account if it is located outside the United States or if it is maintained with a branch of a U.S. bank located outside the United States. An account is not a foreign account if it is maintained with a U.S. branch of a foreign bank located in the United States.
There is a $10,000 USD civil penalty that applies for the non-willful failure to file the FBAR. The penalty for the willful failure to file the FBAR is the greater of $100,000 USD or 50% of the balance in the account at the time of the violation. The willful failure to file the FBAR also may result in criminal penalties including criminal prosecution and imprisonment. The IRS currently has some amnesty programs available for U.S. individuals who have failed to file their FBARs and report the corresponding taxable income.
On March 18, 2010, the Foreign Account Tax Compliance Act (FATCA) was enacted under Sections 1471 through 1474 of the U.S. Internal Revenue Code. If certain due diligence and reporting requirements are not satisfied, FATCA generally imposes a 30% withholding requirement on payments of certain types of U.S. source income to foreign financial institutions (FFIs) and non-financial foreign entities (NFFEs). On January 17, 2013, the U.S. Treasury Department and the IRS issued final regulations under FATCA. The final regulations provided for the phased implementation of FATCA requirements beginning on January 1, 2014 and continuing through 2017. The final regulations provided that withholding would be required to begin for payments made after December 31, 2013. Due diligence for documenting payees and account holders by participating FFIs and withholding agents was required to be phased in during 2014 and 2015. Annual reporting by participating FFIs was required to be phased in starting in 2015. Full scope FATCA reporting was required to begin in 2017.
On July 12, 2013, the IRS issued Notice 2013-43 which provides a revised FATCA implementation timeline. FATCA withholding is now required to begin for
The U.S. federal tax system provides for the direct foreign tax credit and the indirect foreign tax credit. U.S. taxpayers may claim the direct foreign tax credit as a dollar-for-dollar offset against their U.S. federal income tax liability. The credit is claimed for foreign taxes paid directly by the U.S. taxpayer on foreign source income earned outside the United States. The direct foreign tax credit can be claimed by a U.S. individual or corporation that pays foreign tax on foreign source income from activities engaged in directly in a foreign country. The direct foreign tax credit is also available for