How to Deal With the IRS if You Have Undisclosed Foreign Bank Accounts
FATCA Compliance Services
Foreign Account Tax Compliance Act (“FATCA”)
The Department of Justice started pressuring Swiss Banks including UBS and Credit Suisse to reveal bank account information on their account holders who are U.S. citizens or U.S. residents. From their success in 2004 to crack open the Swiss banks, the U.S. government passed legislation in 2010 known as the Foreign Account Tax Compliance Act (“FATCA”). Following the mandate of (FATCA, U.S. tax authorities and foreign governments have entered into agreements known as Intergovernmental Agreement (IGA) to share financial data about each of their citizens. FATCA came into full effect on July 1, 2014 and has now become a huge tool for IRS as part of a crackdown on tax dodging by wealthy Americans requiring foreign financial institutions to disclose to the IRS more about Americans’ Offshore accounts. For any foreign financial institution that fails to comply, the stakes are high as that entity will be frozen out of U.S. capital markets.
Information from the Swiss Banks and other European Banks has now been flowing to IRS and is being used by IRS to uncover taxpayers who have not disclosed foreign income and foreign accounts. The IRS is now aggressively supplementing and corroborating prior leads, as well as developing new leads, involving numerous banks, advisors and promoters from around the world, with a new emphasis in Asia, India, Israel and the Middle East pressuring banks like HSBC and others to reveal U.S. accountholder information.
We can assist with 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.
The IRS has established a Special Unit to disseminate bank information received from foreign banks and compare it to the forms and information reported by U.S. taxpayers on their tax returns. In addition, this Unit is able to review previously filed FBAR’s to determine whether all income was reported on each income tax return. Starting in 2011, taxpayers who have foreign assets will be required to disclose those assets with the filing of their Federal Individual Income Tax Return. This reporting which is made on Form 8938, Statement of Specified Foreign Financial Assets, will serve as an additional tool for this Unit.
In advance of the expected large wave of enforcement to be commenced by IRS, the IRS had established programs for taxpayers to voluntarily come forward and disclose unreported foreign income and foreign accounts.
Options Available For U.S. Taxpayers with Undisclosed Foreign Financial Assets As Modified By The IRS On June 18, 2014
The four options are:
- Voluntary Disclosure Program;
- Streamlined Filing Compliance Procedures;
- Delinquent FBAR submission procedures; and
- Delinquent international information return submission procedures.
- Relief Procedures for Certain Former Citizens (U.S. Expats)
Voluntary Disclosure Program
Since September 28, 2018, the IRS discontinued the Offshore Voluntary Disclosure Program (OVDP); however, on November 20, 2018 the IRS issued guidelines by which taxpayers with undisclosed foreign bank account and unreported foreign income can still come forward with a voluntary disclosure. The voluntary disclosure program is specifically designed for taxpayers with exposure to potential criminal liability and/or substantial civil penalties due to a willful failure to report foreign financial assets or foreign in income.
For all voluntary disclosures received after September 28, 2018, the IRS will apply the civil resolution framework outlined below.
In general, voluntary disclosures will include a six-year disclosure period. The disclosure period will require examinations of the most recent six tax years so taxpayers must submit all required returns and reports for the disclosure period.
The IRS will determine applicable taxes, interest, and penalties under existing law and procedures and assert penalties as follows:
- Except as set forth below, the civil penalty under I.R.C. § 6663 for fraud or the civil penalty under I.R.C. § 6651(f) for the fraudulent failure to file income tax returns will apply to the one tax year with the highest tax liability. For purposes of this memo, both penalties are referred to as the civil fraud penalty and carries a penalty rate of 75% against the amount of increase in tax.
- In limited circumstances, the IRS may apply the civil fraud penalty to more than one year in the six-year scope (up to all six years) based on the facts and circumstances of the case, for example, if there is no agreement as to the tax liability.
- The IRS may apply the civil fraud penalty beyond six years if the taxpayer fails to cooperate and resolve the examination by agreement.
- Willful FBAR penalties will be asserted in accordance with existing IRS penalty guidelines under Internal Revenue Manual Sections 4.26.16 and 4.26.17.
- A taxpayer under this voluntary disclosure program is not precluded from requesting the imposition of accuracy related penalties under I.R.C. § 6662 (which carries a penalty rate of 20%) instead of civil fraud penalties or non-willful FBAR penalties instead of willful penalties (both of which are much higher). Additionally, taxpayers can appeal an agent’s determination to the IRS Office Of Appeals. That being the case, hiring qualified tax counsel experienced in voluntary disclosure early on should increase the chances of securing a lower penalty amount.
Streamlined Filing Compliance Procedures
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.
Taxpayers will be required to certify that the failure to report all income, pay all tax, and submit all required information returns, including FBARs (FinCEN Form 114, previously Form TD F 90-22.1), was due to non-willful conduct.
If the IRS has initiated a civil examination of a taxpayer’s returns for any taxable year, regardless of whether the examination relates to undisclosed foreign financial assets, the taxpayer will not be eligible to use the streamlined procedures. Similarly, a taxpayer under criminal investigation by IRS Criminal Investigation is also ineligible to use the streamlined procedures.
Taxpayers eligible to use the streamlined procedures who have previously filed delinquent or amended returns in an attempt to address U.S. tax and information reporting obligations with respect to foreign financial assets (so-called “quiet disclosures” made outside of the OVDP or its predecessor programs) may still use the streamlined procedures.
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 OVDI penalty.
Non-residency requirement applicable to individuals who are U.S. citizens or lawful permanent residents (i.e., “green card holders”): Individual U.S. citizens or lawful permanent residents, or estates of U.S. citizens or lawful permanent residents, meet the applicable non-residency requirement if, in any one or more of the most recent three years for which the U.S. tax return due date (or properly applied for extended due date) has passed, the individual did not have a U.S. abode and the individual was physically outside the United States for at least 330 full days. Under IRC section 911 and its regulations, which apply for purposes of these procedures, neither temporary presence of the individual in the United States nor maintenance of a dwelling in the United States by an individual necessarily mean that the individual’s abode is in the United States.
Non-residency requirement applicable to individuals who are not U.S. citizens or lawful permanent residents: Individuals who are not U.S. citizens or lawful permanent residents, or estates of individuals who were not U.S. citizens or lawful permanent residents, meet the applicable non-residency requirement if, in any one or more of the last three years for which the U.S. tax return due date (or properly applied for extended due date) has passed, the individual did not meet the substantial presence test of IRC section 7701(b)(3).
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% 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
Delinquent FBAR Submission Procedures
Taxpayers who do not need to use either OVDP or the Streamlined Filing Compliance Procedures to file delinquent or amended tax returns to report and pay additional tax, but who (1) have not filed a required Report of Foreign Bank and Financial Accounts (FBAR) (FinCEN Form 114, previously Form TD F 90-22.1), (2) are not under a civil examination or a criminal investigation by the IRS, and (3) have not already been contacted by the IRS about the delinquent FBARs can file the delinquent FBARs with a statement explaining why the FBARs are filed late. Be aware that the IRS has discretion whether to abate penalties for the failure to file the delinquent FBARs. To qualify for this relief you must have properly reported on your U.S. tax returns, and paid all tax on, the income from the foreign financial accounts reported on the delinquent FBARs and you have not previously been contacted regarding an income tax examination or a request for delinquent returns for the years for which the delinquent FBARs are submitted.
Delinquent International Information Return Submission Procedures
Taxpayers who do not need to use either OVDP or the Streamlined Filing Compliance Procedures to file delinquent or amended tax returns to report and pay additional tax, but who (1) have not filed one or more required international information returns, (2) have reasonable cause for not timely filing the information returns, (3) are not under a civil examination or a criminal investigation by the IRS, and (4) have not already been contacted by the IRS about the delinquent information returns can file the delinquent information returns with a statement of all facts establishing reasonable cause for the failure to file. As part of the reasonable cause statement, taxpayers must also certify that any entity for which the information returns are being filed was not engaged in tax evasion. If a reasonable cause statement is not attached to each delinquent information return filed, penalties may be assessed in accordance with existing procedures.
Relief Procedures for Certain Former Citizens (U.S. Expats)
The Relief Procedures for Certain Former Citizens introduced by the IRS in September 2019 apply only to individuals who have not filed U.S. tax returns as U.S. citizens or residents, owe a limited amount of back taxes to the United States and have net assets of less than $2 million. Only taxpayers whose past compliance failures were non-willful can take advantage of these new procedures. For those expat-individuals who missed the opportunity to come forward in the IRS’ Offshore Voluntary Disclosure Program (“OVDP”), this is a huge opportunity. Many in this group may have lived outside the United States most of their lives and may have not been aware that they had U.S. tax obligations.
Eligible individuals wishing to use these relief procedures are required to file outstanding U.S. tax returns, including all required schedules and information returns, for the five years preceding and their year of expatriation. Provided that the taxpayer’s tax liability does not exceed a total of $25,000 for the six years in question, the taxpayer is relieved from paying U.S. taxes and they will not be assessed penalties and interest.
These procedures are only available to individuals. Estates, trusts, corporations, partnerships and other entities may not use these procedures.
These procedures may only be used by taxpayers whose failure to file required tax returns (including income tax returns, applicable gift tax returns, information returns (including Form 8938, Statement of Foreign Financial Assets), and Report of Foreign Bank and Financial Accounts (FinCEN Form 114, formerly Form TD F 90-22.1)) and pay taxes and penalties for the years at issue was due to 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.
Other Things To Consider
Recent closure and liquidation of foreign accounts will not remove your exposure for non-disclosure as the IRS will be securing bank information for the last eight years. Additionally, as a result of the account closure and distribution of funds being reported in normal banking channels, this will elevate your chances of being selected for investigation by the IRS. For those taxpayers who have submitted delinquent FBAR’s and amended tax returns without applying for amnesty (referred to as a “quiet disclosure”), the IRS has blocked the processing of these returns and flagged these taxpayers for further investigation. You should also expect that the IRS will use such conduct to show willfulness by the taxpayer to justify the maximum punishment.
Additionally, starting with the 2011 Tax Return Filing Season: U.S. taxpayers who have an interest in foreign assets with an aggregate value exceeding $50,000 must include new Form 8938 (Statement of Specified Foreign Financial Assets) with their Federal income tax return. This reporting will serve as an additional tool for the IRS to determine prior noncompliance of taxpayers who have undisclosed foreign accounts or unreported foreign income. The new Form 8938 filing requirement does not replace or otherwise affect a taxpayer’s obligation to file an FBAR (Report of Foreign Bank and Financial Accounts). Failing to file Form 8938 when required could result in a $10,000 penalty, with an additional penalty up to $50,000 for continued failure to file after IRS notification. A 40% penalty on any understatement of tax attributable to non-disclosed assets can also be imposed.
If the IRS has already selected you for an audit or you are being investigated, these programs are not available to you. To find out how you must now protect yourself, click here.
Click here for FAQ’s on applying for amnesty.
For those taxpayers who have filed for amnesty and are having difficulty with their case or do not have the confidence in their representative to secure the best possible result, we offer a service whereby we would evaluate your case and discuss your options. We have found that the Revenue Agents working these cases have made errors that favor the IRS. Let our experience work for you to avail you of the benefits of this amnesty program with the lowest liability possible. Contact an IRS lawyer today.
Given the wealth of foreign account information released to the IRS and the IRS’ expansion of resources to enforce compliance, this may be the last opportunity for taxpayers to resolve unreported foreign income issues without criminal prosecution. Once the IRS has commenced an investigation, a taxpayer cannot enter into a Voluntary Disclosure Program. We recommend that taxpayers in this situation act immediately and seek assistance from an IRS attorney with expertise in the Voluntary Disclosure Program for undisclosed foreign accounts.
For prompt evaluation of your case, we encourage you to contact us using our toll-free number at 866.494.6829.
IRS Announces New Initiative To Target Unreported Indian Accounts In Northern California
Late last year at a California Bar conference, an IRS official stated that the IRS will start in 2014 a new Indian initiative targeted at individuals with undeclared Indian accounts.
Nicholas Connors, a supervisory revenue agent with the IRS small business/self employed division stated that the IRS will soon “begin examining US taxpayers suspected of holding undeclared accounts in Indian banks”.
The United States is the only country that requires citizens and residents (i.e. green card holders) to report their worldwide income, no matter where in the world they might live or how many other citizenships they might hold. Also, U.S. citizens and residents are required to file an FBAR with the U.S. Treasury disclosing any foreign financial account over $10,000 in which they have a financial interest, or over which they have signature or other authority. A willful failure to report a foreign account can result in an annual penalty of up to 50 percent of the amount in the account.
Connors stated that the IRS has received the first round of information on accounts from Indian banks. From this batch, there are at least 100 Indian bank account cases that the IRS is sending out for examination (also known as audit) across the country. “I think California, because of the large Indian population, is going to get more than its fair share of cases,” Connors said.
“Within the Northern California/Bay Area, the IRS Northern California/Bay Area office is scheduled to pick up 30 or 40 of those.” Connors further added that “Looking ahead, the offshore bank investigations are just going to grow” and “within the IRS audit division, there’s talk that this could someday become a work issue for every single revenue agent in the IRS where everyone will be working some type of offshore case.”
While much recent publicity has affirmed that the IRS has been targeting Swiss and Israeli banks, India also continues to be a focal point for the United States government. As a result, over the past 5 years, more than a dozen NRI’s have pled or have been found guilty of failure to report foreign income and accounts in U.S. criminal courts. Most recently, Ashvin Desai of San Jose, California was convicted in October 2013 of tax evasion. According to evidence presented at trial, Desai and his family maintained bank accounts worth more than $7 million with The Hong Kong and Shanghai Banking Corporation Ltd. (HSBC) in India. Desai prepared and filed income tax returns for his family members that failed to report the accounts or over $1.1 million in interest generated by them over three years.
Congress has also enacted the Foreign Account Tax Compliance Act, requiring foreign banks to disclose U.S. customer accounts every year or pay a 30% tax on their U.S. investment income.
If you have never reported your foreign investments on your U.S. Tax Returns, you should seriously consider participating in the IRS’s Offshore Voluntary Disclosure Initiative (OVDI). 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 San Francisco, Los Angeles and elsewhere in California qualify you for OVDI.
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.
Final FATCA rules are issued – Deadline Is July 1, 2014 For Foreign Banks To Disclose U.S Account Holders To IRS
Last week the IRS released a large package of regulations needed to implement the Foreign Account Tax Compliance Act (FATCA). FATCA, enacted as part of the Hiring Incentives to Restore Employment Act of 2010, P.L. 111-147, requires U.S. withholding agents to withhold tax on certain payments to foreign financial institutions (FFIs) that do not agree to report certain information to the IRS regarding their U.S. accounts and on certain payments to certain nonfinancial foreign entities (NFFEs) that do not provide information on their substantial U.S. owners to withholding agents. FATCA withholding goes into effect July 1, 2014.
One significant change is to accommodate direct reporting by certain entities about their substantial U.S. owners to the IRS rather than to withholding agents. What this means is that your foreign bank can now directly report U.S. account holders directly to IRS without going through any third party or foreign government agency and be in compliance with FATCA.
The IRS has also made it easy for foreign banks to report U.S. account holders through an online FATCA registration system IRS has launched. FFIs that are required to participate or else face withholding on their U.S. investments include:
- Depository institutions, such as banks;
- Custodial institutions, such as mutual funds;
- Investment entities, such as hedge funds; and
- Certain insurance companies that have cash-value products or annuities.
If you have never reported your foreign investments on your U.S. Tax Returns, you should seriously consider participating in the IRS’s Offshore Voluntary Disclosure Initiative (OVDI). 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 and elsewhere in California qualify you for OVDI.
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.
IRS Insists – No More FATCA Implementation Delays
U.S. tax authorities and foreign governments are on track to conclude dozens of agreements in coming months on the sharing of financial data about citizens giventhe July 1, 2014 deadline nearing for implementation of a sweeping U.S. anti-tax evasion law – the Foreign Account Tax Compliance Act (FATCA). If a foreign bank or financial institution falls to comply with FATCA, it could be frozen out of U.S. capital markets. Thus, foreign firms have a big incentive to comply with the law in reporting U.S. account holders.
Lately there have been many rumors about another delay for FATCA. . In fact, some foreign financial institutions as well as some governments say they need more time. The IRS has already delayed implementation twice and is currently set on a July 1st implementation date. We believe that the IRS will not allow a third extension and here’s why:
- Michael Danilack, IRS Deputy Commissioner, recently announced that FATCA’s July 1, 2014implementation date was not going to be postponed again. Mr. Danilack is the number two person at IRS and he reaffirmed to his listeners that the IRS will be ready for FATCA implementation on July 1st.
- Thereafter the top IRS boss, Commissioner John Koskinen, made it crystal clear saying “We’re not going to have any delays. We expect to issue the final package of rules shortly. We are working diligently to finalize all related guidance to ensure that financial institutions have time to effectively prepare and comply, and there is no consideration for a delay of FATCA implementation.”
With such strong words from the number one and two people in the IRS, it is clear the IRS is fully committed to the July 1st start date.
FATCA is hugely unpopular among foreign banks but Congress passed the law for a reason – many foreign banks were helping Americans evade taxes. While the law may be flawed, we doubt it will be repealed.
With or without FATCA, Americans, dual nationals, expats and green card holders remain obligated to report their offshore accounts. The penalties for failure to report required FBARs (Report of Foreign Bank and Financial Accounts) are tied to the Bank Secrecy Act which has been on the books since 1970. FATCA has no bearing on those penalties or the duty to file FBAR forms.Under current banking law – not FATCA – the penalties are up to the greater of $100,000 or 50% of the highest historical account balance. These are not hypothetical maximums; these are penalties routinely imposed by the IRS which they can charge without court action.
So what does this mean for taxpayers with undisclosed foreign accounts?
It means time is running out and we recommend quick action. With the fiscal challenges face by the U.S. government, the IRS and Justice Department are committedto uncover unreported foreign accounts and missing FBARswhich will be a lot easier once the foreign banks will start handing over data about American account holders.Although the IRS has an amnesty and expat reporting options available, those deals are off the table if the IRS finds your account first.
If you have never reported your foreign investments on your U.S. Tax Returns or even if you have already quietly disclosed, you should seriously consider participating in the IRS’s Offshore Voluntary Disclosure Initiative (OVDI) which allows taxpayers to come forward to avoid criminal prosecution and not have to bear the full amount of penalties normally imposed by IRS. 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.
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.
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