“Gatherwright Freeman has extensive experience in successfully filing voluntary offshore disclosures for taxpayers.”
The Voluntary Disclosure Program and Reporting Offshore Accounts and Assets
FBAR/ Foreign Accounts over $10,000: The Bank Secrecy Act requires taxpayers with an interest or signature authority over any foreign financial account, including bank account, brokerage account, mutual fund, trust, or other type of foreign financial account, to report the account yearly to the IRS by filing a Report of Foreign Bank and Financial Accounts (FBAR) if the accounts have an aggregate value over $10,000. FBARs are filed with the government’s Financial Crimes Enforcement Network (FinCEN). This does not mean it is a crime to have a foreign account, but it may be criminal if you willfully fail to follow the reporting requirements.
There are both civil and criminal penalties for failure to file a FBAR. The criminal tax penalties can result in a fine of not more than $ 250,000, or five years in prison, or both. For willful violations occurring prior to October 23, 2004, a civil penalty equal to the greater of the balance in the account at the time of the violation (not to exceed $100,000) or $25,000. Offshore account holders can avoid criminal tax penalties by making a voluntary disclosure to the government BEFORE the IRS finds out about you.
In addition to criminal penalties there are substantial civil penalties for failure to file FBARs. There is a three tier system for these civil FBAR penalties. For willful violations occurring after October 22, 2004, the maximum civil penalty is the greater of $100,000, or 50 percent of the balance of the account at the time of the violation. For example, if the account balance is $4,000,000 the maximum penalty would be $2,000,000. However, for each year the FBAR is not filed the penalty can be imposed again. Therefore it is quite possible for the maximum FBAR penalty to be several times the balance in offshore accounts.
Offshore Voluntary Disclosure Initiative (OVDI): In 2012 the government introduced a voluntary disclosure program for those with unreported offshore accounts and assets. Under the 2012 OVDI, taxpayers are generally required to amend 8 years of tax returns and pay the tax due thereupon, plus a 20% negligence penalty (as opposed to the normal 75% fraud penalty) on each year, and file 8 years of FBARs and pay a 27.5% FBAR penalty on the one highest year (as opposed to the normal FBAR penalty which is the higher of $100,000 or 50% for each year). The 2012 OVDI is still available for those taxpayers with foreign assets who do not qualify for the IRS’s 2014 Streamlined Offshore Disclosure program.
Streamlined Offshore Disclosure: In July 2014 the IRS introduced the Streamlined Offshore Disclosure program which requires four basic steps as follows:
(1.) Amend tax returns for each of the most recent three years;
(2.) File FBARs for each of the most recent six years;
(3.) Certification. Complete and sign a statement certifying (a.) that the taxpayer is eligible for the program; (b.) all required FBARs have been filed; (c.) the failure to report all income, pay all tax, and submit all required information returns was nonwillful; and (d.) the penalty amount included with the filing is accurate; Pay 5% penalty. On the highest aggregate balance/value of the taxpayer’s foreign financial assets; and
(4.) Pay all of the tax and interest due on the tax returns.
Certain taxpayers who are not eligible for the Streamlined Offshore Disclosure due to willfulness may still be eligible for the 2012 OVDI.
Attorney-Client Privilege: The IRS can forbear from referring for criminal prosecution taxpayers who come forward to admit previously unreported tax liabilities and unreported foreign accounts. Accountants may be in a position to learn of clients’ intentions to make such disclosures. Where disclosures could otherwise entail criminal penalties, CPAs should refer clients to a qualified attorney in keeping with AICPA Statement on Standards for Tax Services no. 6 and for the availability of attorney-client privilege.
FATCA/Foreign Accounts and Other Foreign Assets over $50,000: In 2011 the Foreign Account Tax Compliance Act (“FATCA”) began requiring taxpayers to attach a “Form 8938 Statement of Specified Foreign Financial Assets” when filing their Form 1040 to report foreign assets if the value of the account(s) or asset(s) is over $50,000 at end of the year or $75,000 during the year. This form is filed with directly with the IRS. Real estate in foreign countries is not reportable if it is owned in your individual name. FATCA also requires foreign banks to report information related to the ownership by U.S. taxpayers of assets held overseas.