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Getting Into Compliance with Your Foreign Account Reporting, Part III

When Lionel Messi was charged with tax fraud in Spain, his first line of defense was "I was playing football, I knew nothing." The court did not care that Messi signed documents handed to him by his father and advisors without reading them, and ruled that the renowned soccer player knew enough to be found guilty of tax fraud. Messi and his father were fined millions of Euros for using offshore companies in Uruguay and Belize to defraud the Spanish government of roughly $4.5 million in taxes between 2007 and 2009. They also received 21-month suspended prison sentences.

Getting all the information

If you don’t already have a good understanding of your foreign assets, it is time to begin gathering as much information as possible. Expect to be asked to provide documentation regarding your interests in the following, going as far back as eight or nine years:

  • Foreign bank accounts, including accounts held at a foreign branch of a U.S. financial institution, and any foreign financial account for which you have signature authority
  • Foreign investment and brokerage accounts, including foreign mutual funds, as well as foreign stocks and securities not held in an account at a foreign financial institution
  • Foreign hedge funds and private equity funds
  • Foreign retirement plans and deferred compensation plans
  • Foreign corporations, partnerships and trusts
  • Foreign life insurance and annuity contracts

Foreign real estate is not directly reported, but the value will need to be included in reports if held through a foreign entity (bring all documentation to your tax advisor).

Note that some of our clients have had to travel to the country in which their accounts and/or assets are located in order to get the required information.

Filing thresholds

You must file an FBAR if the combined value of all your foreign financial accounts exceeds $10,000 at any point (day, hour or minute) of the calendar year. The filing threshold for Form 8938, Statement of Specified Foreign Financial Assets, ranges from $50,000 to $600,000, depending on whether you live in the U.S. or abroad, and your marital/filing status. Note that there are a number of other international tax filing obligations, most of which must be included with your annual individual or corporate tax returns.

Answering questions

In addition to gathering the required information, be prepared to answer some questions that are likely to be posed by the IRS:

  • How did you obtain the foreign account or asset?
  • Did you know about reporting requirements?
  • Why didn’t you report this information to begin with?

Needless to say, "I was just playing football" is not an acceptable response!

Don’t accept less than the highest quality tax preparation and legal services

Accountants and tax attorneys can’t help you come into compliance with your IRS and FinCEN foreign account reporting unless they have all the information. The highly experienced tax attorneys at Moskowitz, LLP are on your side! We will talk to you, learn the details of your situation, and tailor a program that is right for you. We will do everything possible to get you into compliance with your foreign account reporting without your having to pay outrageous, disproportionate penalties. Call our San Francisco office today.

Getting Into Compliance with Your Foreign Account Reporting, Part II

In Part I, we listed some of the penalties associated with the failure to report foreign accounts, and what is widely regarded as the best option for coming into compliance – the Offshore Voluntary Disclosure Program (OVDP). In this post, we are going to introduce two other options: Streamlined Filing Compliance and Quiet Disclosures.

Streamlined Filing Compliance

If you and your tax attorney think that you can demonstrate to the government’s satisfaction that your failure to report was not willful, Streamlined Filing Compliance procedures may be a possibility.

Meeting the requirements for Streamlined Filing Compliance is extremely difficult. For one thing, you must prove that your failure to report your foreign income, pay your taxes, and submit all of the required information returns (including FBARs) was not willful. In addition, if the IRS has already initiated a civil examination of your tax returns for any taxable year, or a criminal investigation, you are ineligible – even if the examination or investigation is entirely unconnected with your foreign assets.

If you manage to succeed with this compliance method, the tax penalty is only 5%. Streamlined Filing Compliance is available to individual U.S. taxpayers residing both inside and outside the United States, and to the estates of individual taxpayers.

The "Quiet Disclosure"

Tens of thousands of taxpayers each year file “Quiet Disclosures” – amended returns, delinquent FBARs and other foreign account disclosures – and hope that they won’t get caught.

The result can be disastrous. The IRS has been promoting the OVDP for many years and wants taxpayers in it – it is therefore increasing its scrutiny of Quiet Disclosures and as a result, they can now serve as a red flag for an audit. Quiet Disclosures are definitely not for taxpayers who never filed and/or whose taxable income would change as a result of an amended filing.

Quiet Disclosures may be prudent in limited circumstances, such as where the taxpayer has no financial interest in an account but is listed as a signatory (e.g., the child of a foreign account owner). Note that if a delinquent FBAR form is filed, the IRS recommends that an explanatory letter be included, although this still does not guarantee that the taxpayer will avoid FBAR penalties.

A Quiet Disclosure should never be done without professional tax assistance.

Other, Less Utilized Options

There also are other voluntary disclosures (laid out in IRS manual 9.5.11.9) that may be worth exploring with your tax advisor.

The tax preparation team at Moskowitz, LLP assists many U.S. taxpayers come into compliance with their foreign account reporting. Part III, our last post in this series, will focus on the information your tax team will need to help you.