iRecord breaking fines and massive media attention over unreported foreign bank accounts has raised awareness about offshore reporting requirements and the need to file FBAR forms. An FBAR is a Report of Foreign Bank and Financial Accounts. FBAR forms are generally required when the aggregate amount of a taxpayer’s offshore financial holdings exceeds $10,000.
Penalties for an unreported offshore account can be huge. In recent years, the IRS has been routinely assessing civil penalties of the greater of $100,000 or 50% of the highest historical account balance when they believe the failure to report was willful. In a few cases, taxpayers have been criminally prosecuted as well.
While all this media attention has caused many people to come forward, a few have become too frightened to take action. These folks worry that becoming forward they could lose everything. Others try what the IRS calls a “quiet disclosure” and just file missing FBAR forms and amend their tax returns. Both are bad ideas. If this sounds like you, speak to an experienced tax lawyer immediately.
On January 13th, the IRS issued new guidance for those with missing FBAR filings and unreported accounts. For those that meet the criteria, compliance may be quite easy and painless.
Situation 1. Taxpayers who have properly reported all taxable income but failed to file an FBAR
Taxpayers who properly reported all their taxable income can file the late FBAR forms and attach a statement explaining why the reports were late. The IRS says it will not impose an FBAR penalty if there are no underreported taxes owed and the IRS has not already contacted the taxpayer.
Situation 2. Taxpayers who have delinquent information returns but owe no tax
A taxpayer that has reported all their taxable income and properly paid tax but simply failed to file an informational return should file the missing return and a letter of explanation. The IRS has specifically said that it will waive penalties for missing Form 5471 (Controlled Foreign Corporations) and Form 3520 (Foreign Trust Return) if there was no underreported tax and the IRS has not already contacted the taxpayer.
Situation 3. Non-resident U.S. taxpayers with delinquent returns and low risk factors
The IRS maintains a streamlined filing program for certain taxpayers they view as “low risk.” Generally if the total unreported tax obligation is $1500 or less, those who qualify can obtain a significant break on their penalties. Unfortunately, this program is geared to folks living outside the United States such as green card holders, American expats and dual nationals. If you reside in the U.S, you probably do not qualify.
Situation 4. All others
There are options for all those that have not properly filed FBAR forms and who haven’t paid taxes on their offshore income. The primary vehicle is the Offshore Voluntary Disclosure Program or OVDP. The penalties in this so-called amnesty program can be significant but the program offers certainty and avoids possible criminal prosecution.
Generally, taxpayers accepted into the program must submit up to 8 years of amended income tax returns and missing FBAR forms. Those that disagree with the penalty calculations can “opt out” of the problem and go through traditional penalty abatement procedures.
As noted by the IRS, taxpayers should consult with a tax professional to figure out which option best fits. The potential penalties are so large that we recommend always consulting with a tax lawyer. Some law firms, such as Mahany & Ertl, offer flat fees or free initial consultations.
