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IRS Issues Guidance on Foreign Bank Account Report / FBAR Penalties

Form 8791
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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.

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

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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.

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