Tax Lawyer Blog

A Blog written by the Tax Attorneys for Individuals and Businesses

Getting Into Compliance with Your Foreign Account Reporting, Part I

With the 2015 release of the “Panama Papers,” roughly 11.5 million documents detailing personal financial information of wealthy individuals and identifying nearly 215,000 offshore entities are now available to government authorities. That and other leaks, as well as the overall step-up in global efforts to curb tax avoidance, means that the heat is on for people with foreign investments to get their filings in order before it’s too late.

The Consequences of Doing Nothing

Coming into compliance is not an easy task, but the consequences of not doing so are far worse than the penalties for coming clean with the IRS. Following is what you face by keeping your assets hidden:

  • The penalty for non-willful FBAR noncompliance is $10,000 per account, per year
  • The penalty for willful FBAR noncompliance is the greater of $100,000 or 50% of the account balance each year, plus criminal penalties
  • The penalties for failure to file Form 8938, Statement of Specified Foreign Financial Assets, are up to $10,000 for failure to disclose, plus $10,000 for each 30 days of non-filing following receipt of an IRS notice (up to $60,000), plus criminal penalties
  • Civil penalties for tax fraud can be as much as 75% of the tax underpayment, in addition to the taxes that are owed
  • Criminal penaltiesinclude fines of up to $250,000 for individuals ($500,000 for corporations), and up to 5 years’ imprisonment

That said, here are some options for coming into compliance with your foreign reporting:

The Offshore Voluntary Disclosure Program (OVDP)

The Offshore Voluntary Disclosure Program (OVDP) provides an opportunity for taxpayers who have willfully failed to report and pay tax to voluntarily come forward with previously undisclosed foreign assets and accounts. Note that you cannot take advantage of this program if you are already under investigation.

If you go into the OVDP, you should expect to pay a penalty of up to 50% of the account at its highest value. For example, let’s say someone opened a bank account in Switzerland in 2009 with a deposit of $500,000. The account has earned $25,000 annually. From 2009 through 2016, the highest account balance was $700,000. The total that person should expect to pay would be $276,500 plus interest, calculated as follows:

  • Eight years of taxes, for a total of $70,000 ($8,750 x 8 years) plus interest
  • A 20% accuracy-related penalty of $14,000 ($70,000 x 20% penalty)
  • An offshore penalty of $192,500 ($700,000 x 27.5% penalty)

If you have unreported offshore income, moving quickly with the OVDP may be your best option. Although the penalties are harsh, they are still lower than doing nothing and they can protect you from criminal prosecution. (Under certain circumstances, it may be prudent to choose to “Opt-Out” of the OVDP, and allow a revenue agent to determine an appropriate penalty based on your specific facts and circumstances.)

Keep in mind that the IRS is currently targeting OVDP declines and withdrawals in a new audit campaign, so prompt resolution of your compliance issues is as important as ever. The tax team at Moskowitz, LLP can help you make an informed decision on how to proceed.

Our next post will continue with Streamlined Filing Compliance procedures for non-willful failure to file and "Quiet Disclosures."

Reporting Foreign Income: Four Common Misconceptions

The U.S. government has stringent reporting requirements when it comes to foreign assets and income, but many people are still not coming into compliance based on some mistaken beliefs. Here are four common misconceptions regarding foreign income and asset reporting:

#1: The income I earn in foreign countries is not taxable

All U.S. citizens and resident aliens are required to report their worldwide income on their U.S. income, estate and gift tax returns. In many cases, you may claim the benefits of a tax treaty between the United States and the country in which your foreign income is earned. You must, however, reported all foreign income on your U.S. tax return(s) and it is certainly subject to tax.

#2: If I complete the foreign reporting forms I will be audited

Foreign reporting forms must be completed and filed as required by law, and compliance will not necessarily lead to an audit. Even if you are audited, if all of your tax affairs are in order it is generally fairly easy and straightforward to handle any questions or issues raised by the Internal Revenue Service.

#3: I don’t need to report my foreign life insurance, retirement, and other non-traditional financial accounts on my FBAR

You must file an FBAR if the aggregate value of your foreign financial accounts exceeds $10,000 at any point during the calendar year - even if it is for a single day and even if the account produces no income. Financial accounts that must be reported include all of the following:

  • Checking, savings and passbook accounts
  • Securities and other investment accounts
  • Certificates of deposit
  • Mutual funds and similar pooled funds
  • Accounts with a broker-dealer for futures and options transactions
  • Insurance and annuity policies with a cash value

There are few exceptions to FBAR reporting, which are listed in the FBAR line item filing instructions. These exceptions include, but are not limited to: entities named in a consolidated FBAR filed by a greater than 50% owner and participants in tax-qualified retirement plans as described in 26 U.S. Code § 401(a) and 26 U.S. Code §§ 403(a) or (b).

#4: I don’t need to file an FBAR since the foreign account is not in my name

If you are the owner of record or the holder of legal title to a foreign financial account, you are generally required to file an FBAR. With few exceptions, you must also file if you have “signature or other authority” over a foreign account.

U.S. tax preparation and tax law firm

The Moskowitz, LLP tax preparation team works with numerous individuals and companies on their annual returns and reporting, and also helps those who haven’t reported anything in many years to come into compliance. If you have a foreign account and/or foreign income, note that penalties for reporting noncompliance are extremely harsh and simply not worth the risk. Contact our San Francisco office for assistance.