The Federal government is stepping up the pressure on taxpayers to report their offshore assets as a deadline to report foreign bank accounts draws near. Taxpayers need to be sharply aware of their responsibility to file the Form FinCEN 114 (formerly known as Form TD F 90-22.1), Report of Foreign Bank and Financial Accounts (“FBAR”), as the June 30 due date draws near. There are no extensions and no exceptions. The passing of the FBAR deadline will certainly create more headaches for taxpayers with undeclared foreign assets.

The FBAR is just one facet of the IRS’ continued pursuit of information on accounts and assets held in other countries. In an age of increased criminal enforcement, the emphasis on the FBAR, and the Foreign Account Tax Compliance Act (“FATCA”), it is more important than ever for taxpayers to come into compliance.

U.S. citizens living abroad, dual citizens, and those living in the United States all need to understand their responsibilities and already many taxpayers have come into compliance by entering into a program called the Offshore Voluntary Disclosure Initiative (“OVDI”) whereby taxpayers can avoid criminal prospection and the penalties are reduced. Nevertheless, there are still a lot of people in the U.S. who have never heard of it but with the better level of publicity that has been put out there and the upcoming June 30^th deadline, this has captured the attention of many more taxpayers and practitioners in recent weeks.

For a large number of people who are unaware of this problem, the prevailing view seems to be that because the taxpayer is paying taxes where the account is located and therefore it’s not taxable here in the United States. But even with the income being reported in the foreign country and the foreign taxes paid it doesn’t change the fact that it needs to be reported in the U.S.

In addition to those who simply do not know, there is a whole group of people who have become aware of the requirement and are paralyzed with fear that the IRS will come after them for back years. They are plain scared and are continuing to let things lapse which only makes matters worse as the penalties continue to mount year-by-year.

Failure to File

While the FBAR is an information return that imposes no tax, significant civil and criminal penalties may be asserted for failure to file. The civil penalty for willful failure to file an FBAR equals the greater of $100,000 or 50% of the total balance of the foreign account per violation.  The government may also pursue criminal prosecution which can result in up to five years of jail time. Non-willful violations that are not due to reasonable cause incur a penalty of $10,000 per violation.

4^th Circuit Court Established Low Standard For Proving Willfulness

The 4^th Circuit ruled that a taxpayer’s signature on his tax return was “prima facie evidence that he knew the contents of the return” and that the instructions in Schedule B, which refers to whether the taxpayer has any foreign accounts put U.S. taxpayers on “inquiry notice” of the FBAR filing requirement. It does not matter that the taxpayer never read his tax return or looked at the FBAR form. The Court went on to say that this was enough to demonstrate a “conscious effort to avoiding learning about reporting requirements… meant to conceal or mislead sources of income or other financial information… that constitutes willful blindness to the FBAR requirements”. U.S. v. J. Bryan Williams, No. 10-2230, July 20, 2012 (unpublished).

Offshore Voluntary Disclosure Initiative (“OVDI”)

This program was first created in 2009 as the Offshore Voluntary Disclosure Program (“OVDP”) but in 2011 was renamed to OVDI. Generally, the miscellaneous offshore penalty under the OVDI program (the “OVDI penalty”) equals 27.5% of the highest aggregate balance in the foreign assets or entities during the years covered by the OVDI program, but may be reduced in limited cases to 12.5% or 5%. Certain taxpayers may qualify for even greater savings through a reduction of the offshore penalty. 

Taxpayers participating in the ongoing 2012 OVDI generally agree to file amended returns and file FBARs for eight tax years, and in addition to paying pay the OVDI penalty (which is assessed in lieu of all other potentially applicable penalties associated with a foreign financial account or entity) taxpayers would pay the appropriate taxes and interest together with an accuracy related penalty equivalent to 20% of any income tax deficiency

Taxpayers whose highest aggregate foreign account balance is less than $75,000 for each of the years in the OVDI disclosure period may qualify for a reduced 12.5% OVDI penalty.

Taxpayers who fall into one of three specific categories may qualify for a reduced 5% OVDI penalty.  The first category includes taxpayers who inherited the undisclosed foreign accounts or assets.  Second, taxpayers who are foreign residents and who were unaware that they were U.S. citizens may qualify for a reduced 5% OVDI penalty.  Finally, U.S. taxpayers who are foreign residents may also qualify for the reduced 5% OVDI penalty in certain circumstances. 

On June 18, 2014, the IRS renamed the program to the 2014 Offshore Voluntary Disclosure Program (“OVDP”).

New Rules Apply For Taxpayers Who Did Not Act Willfully In Failing To Report Foreign Accounts And Foreign Income

On June 18, 2014, the IRS announced major changes in the 2012 offshore account compliance programs, providing new options to help taxpayers residing in the United States and overseas. The changes are anticipated to provide thousands of people a new avenue to come back into compliance with their tax obligations.

The streamlined filing compliance procedures are available to taxpayers certifying that their failure to report foreign financial assets and pay all tax due in respect of those assets did not result from willful conduct on their part.  The streamlined procedures are designed to provide to taxpayers in such situations (1) a streamlined procedure for filing amended or delinquent returns and (2) terms for resolving their tax and penalty obligations.  

The Streamlined Procedures are classified between U.S. Taxpayers Residing Outside the United States and U.S. Taxpayers Residing in the United States.

U.S. Taxpayers Residing Outside the United States

Requires that taxpayers:

• Meet the applicable non-residency requirement described below (for joint return filers, both spouses must meet the applicable non-residency requirement);

• Certify that the failure to report the income from a foreign financial asset and pay tax as required by U.S. law, and failure to file an FBAR (FinCEN Form 114, previously Form TD F 90-22.1) with respect to a foreign financial account, resulted from non-willful conduct.  Non-willful conduct is conduct that is due to negligence, inadvertence, or mistake or conduct that is the result of a good faith misunderstanding of the requirements of the law.

• File 3 years of back tax returns reflecting unreported foreign source income;

• File 6 years of back FBAR’s reporting the foreign financial accounts; and

• Calculate interest each year on unpaid tax.

In return for entering the streamlined offshore voluntary disclosure program, the IRS has agreed:

• Waiver of charges of criminal tax evasion which would have resulted in jail time or a felony on your record; and

• Waiver of other fraud and filing penalties including IRC Sec. 6663 fraud penalties (75% of the unpaid tax) and failure to file a TD F 90-22.1, Report of Foreign Bank and Financial Accounts Report, (FBAR) (the greater of $100,000 or 50% of the foreign account balance).

• Waiver of the 20% accuracy-related penalty under Code Sec. 6662 or a 25% delinquency penalty under Code Sec. 6651; and

• Waiver of any OVDP penalty.

U.S. Taxpayers Residing in the United States

Requires that taxpayers:

• Certify that the failure to report the income from a foreign financial asset and pay tax as required by U.S. law, and failure to file an FBAR (FinCEN Form 114, previously Form TD F 90-22.1) with respect to a foreign financial account, resulted from non-willful conduct.  Non-willful conduct is conduct that is due to negligence, inadvertence, or mistake or conduct that is the result of a good faith misunderstanding of the requirements of the law.

• File 3 years of back tax returns reflecting unreported foreign source income;

• File 6 years of back FBAR’s reporting the foreign financial accounts;

• Calculate interest each year on unpaid tax; and

• Apply a 5% OVDP penalty based upon the highest balance of the account in the past six years.

In return for entering the streamlined offshore voluntary disclosure program, the IRS has agreed:

• Waiver of charges of criminal tax evasion which would have resulted in jail time or a felony on your record; and

• Waiver of other fraud and filing penalties including IRC Sec. 6663 fraud penalties (75% of the unpaid tax) and failure to file a TD F 90-22.1, Report of Foreign Bank and Financial Accounts Report, (FBAR) (the greater of $100,000 or 50% of the foreign account balance).

• Waiver of the 20% accuracy-related penalty under Code Sec. 6662 or a 25% delinquency penalty under Code Sec. 6651; and

For taxpayers currently in the 2011 or 2012 Offshore Voluntary Disclosure Initiative (“OVDI”) there is a deadline of June 30, 2014 to convert your case to be under the new procedures which could substantially reduce your penalties to 5% and in some cases even eliminate them.

What Should You Do?

We encourage taxpayers who are concerned about their undisclosed offshore accounts to come in voluntarily before learning that the U.S. is investigating the bank or banks where they hold accounts. By then, it will be too late to avoid the new higher penalties under the OVDP of 50% percent – nearly double the regular maximum rate of 27.5%.

Don’t let another deadline slip by. If you have never reported your foreign investments on your U.S. Tax Returns or even if you have already quietly disclosed or in 2012 OVDI, you should seriously consider participating in the IRS’s 2014 Offshore Voluntary Disclosure Program (“OVDP”). Once the IRS contacts you, you cannot get into this program and would be subject to the maximum penalties (civil and criminal) under the tax law. Taxpayers who hire an experienced tax attorney in Offshore Account Voluntary Disclosures should result in avoiding any pitfalls and gaining the maximum benefits conferred by this program.

Protect yourself from excessive fines and possible jail time. Let the tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. located in Los Angeles, San Francisco, San Diego and elsewhere in California qualify you for OVDP.

Description: Let the tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. resolve your IRS tax problems, get you in compliance with your FBAR filing obligations, and minimize the chance of any criminal investigation or imposition of civil penalties.