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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.

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."