Tag Archives: Offshore Voluntary Disclosure Program

IRS Issues Guidance on Foreign Bank Account Report / FBAR Penalties

Form 8791
Share Button

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.

For more information, please contact Alison Dougherty of Aronson’s Tax Services Group at 301.231.6290 or adougherty@aronsonllc.com.

Share Button

Expatriates May File within the IRS Offshore Voluntary Disclosure Program & Streamlined Filing Compliance Procedures

international
Share Button

There is more to expatriating for U.S. federal tax purposes than relinquishing U.S. citizenship or a U.S. green card.  It is necessary to comply with certain expatriation requirements in order to be cleared of any continuing U.S. federal tax reporting and payment obligations.  The date of expatriation for U.S. federal tax purposes is the later of the date when the U.S. federal Form 8854 expatriation statement is first filed with the IRS or the date when the individual notifies the U.S. Department of State or the U.S. Department of Homeland Security of the expatriating act.  A former U.S. individual continues to be subject to U.S. federal tax reporting requirements on their worldwide income until the Form 8854 is filed with the IRS and the relevant U.S. federal agency is notified of the expatriation.

U.S. federal expatriation tax rules apply to covered expatriates.  The definition of a covered expatriate includes an individual whose net worth is $2 million or more U.S. dollars on the date of expatriation.  A covered expatriate generally must file U.S. federal tax returns for the five years preceding the date of expatriation, including the Form 8854 expatriation statement, and pay any exit tax that is due.  A dual citizen is subject to the expatriation rules, including the exit tax applicable to covered expatriates unless they file the Form 8854 and U.S. federal tax returns for the five years preceding the date of expatriation.

The IRS has certain amnesty programs available for U.S. taxpayers who are delinquent in reporting offshore assets, foreign accounts and any corresponding taxable income.  Currently, the IRS Offshore Voluntary Disclosure Program (OVDP) is open to U.S. taxpayers with willful or intentional foreign reporting delinquencies.  The IRS also has streamlined domestic and foreign offshore filing compliance procedures available for non-willful foreign reporting delinquencies.

Due to the enactment and implementation of the Foreign Account Tax Compliance Act (FATCA), there are many foreign financial institutions that are in the process of transferring information regarding their U.S. account holders either directly or indirectly to the U.S. government.  Individuals who hold U.S. citizenship or U.S. green card status while living in foreign countries are now facing the serious consequences of not complying with U.S. foreign reporting requirements.  The severe penalty risk and exposure have motivated an increasing number of individuals to voluntarily relinquish their U.S. citizenship or U.S. green cards.  In some cases, such individuals may have expatriated for U.S. immigration purposes but their final U.S. federal tax reporting and payment obligations remain unfulfilled

The IRS has advised that it will allow a former U.S. citizen or U.S. green card holder to file their final five years of U.S. federal tax returns, including the Form 8854, and pay any exit tax due within the scope of either the OVDP or the streamlined filing compliance procedures.  This option provides the opportunity for former U.S. citizens and U.S. lawful permanent residents to come into compliance with their U.S. federal tax filing obligations.  The benefit is that the former U.S. individual will be able to travel to the United States on approved visa status for business or personal reasons without having to live in the shadows with the risk of criminal liability, being denied entry into the United States or having U.S. property or assets seized by the U.S. government.

Please contact Aronson LLC tax advisor, Alison Dougherty at 301.231.6290 or email ADougherty@aronsonllc.com for more information.

Share Button

Options for Delinquent Prior Year FBARs and U.S. Foreign Reporting Forms 8938, 5471, 8865, 3520, etc.

Share Button

What do I do if I had unreported offshore assets or foreign accounts for prior years?

What is the risk of not filing U.S. foreign reporting forms for prior years?

These are questions that U.S. international tax reporting and compliance specialists hear often these days. Surprisingly, the average tax return preparer does not have specialized capability to address the issues that arise when a U.S. taxpayer has offshore assets or foreign accounts. As a result, reliance on someone without this capability can lead to U.S. foreign reporting delinquencies.

Resolution of prior year delinquencies can be a very expensive and time consuming process for U.S. taxpayers, and the failure to address these delinquencies can result in substantial penalty exposure, including criminal prosecution for the intentional or willful failure to file. So, what options are available to a U.S. taxpayer who discovers that offshore assets or foreign accounts should have been reported but were not?

The answer depends on two critical factors:

  • First, ask whether all of the taxable income from the offshore assets or foreign accounts was reported on the U.S. taxpayer’s federal tax return. Unfortunately, it is likely that all of the taxable income was not properly reported if the offshore assets and foreign accounts were not being reported on the required information returns.
  • Second, ask whether the failure to report the offshore assets and foreign accounts, including the related taxable income, was due to non-willful conduct or conduct that was intentional or willful.

If all of the taxable income was reported and the failure to file the U.S. foreign reporting forms was due to non-willful conduct, it is possible for the U.S. taxpayer to file the delinquent forms for the prior years and attach a reasonable cause statement. In this case, the IRS will not impose the civil penalties for late filing the FinCEN Form 114 (f/k/a Form TD F 90-22.1) Foreign Bank Account Report (FBAR) and Forms 8938, 5471, 8865, 3520, etc. This procedure actually replaces FAQs #17 and 18, which are no longer in effect.

If some or all of the taxable income was not reported and the failure to file the U.S. foreign reporting forms was due to non-willful conduct, there are two main options. First, the IRS has new Streamlined Offshore filing compliance procedures that allow the U.S. taxpayer to file three years of amended U.S. federal tax returns and six years of FBARs. The cost of the filing is a 5% Streamlined Offshore penalty plus additional tax and interest on the tax due with the amended tax returns. There is some risk of audit with a Streamlined Offshore filing but the IRS will not impose the civil failure to file penalties which are generally $10,000 USD per form per year unless there is evidence of fraud on the original federal tax returns. Second, there is the quiet disclosure option to which the IRS is seriously opposed and which invites audit risk for all open years including the risk of all applicable penalties being imposed. If the U.S. foreign reporting forms were required but they were not filed, the statute of limitations will still be open on the prior year’s federal tax return.

If some or all of the taxable income was not reported and the failure to file the U.S. foreign reporting forms was due to intentional or willful conduct, then the main option is the IRS Offshore Voluntary Disclosure Program (OVDP). In 2014, the IRS has extended the amnesty available under the protection of the OVDP. The cost of the filing is a 27.5% offshore penalty which, in some circumstances, could be higher if the U.S. taxpayer has foreign accounts with a foreign financial institution that has been identified on a specific list by the U.S. government. The main incentive offered with the OVDP is protection from criminal prosecution and possible imprisonment as a penalty for intentional or willful delinquencies.

Please contact Aronson LLC tax advisor Alison Dougherty at 301.231.6290 for more information.

Share Button

View Archives

Blog Authors

Latest Webinar Videos