Anyone with assets diversified in foreign accounts with balances that total $10,000 or more at any time in a given year needs to file a disclosure (FinCEN Form 114 of previously referred to as a FBAR). Fail to file this disclosure and the penalties are draconian.
Since 2008, the Department of Justice in coordination with IRS Criminal Investigations has brought charges of tax evasion and willful failure to report foreign account charges against more than 160 individuals. The Offshore Voluntary Disclosure Programs (OVDP) have brought in more than $10 billion in tax, penalties and interest as more than 55,000 have used the programs to come into compliance. Word has gotten out as the number of FBARs filed each year has increased to more than one million in 2015.
In addition to the OVDP, the IRS offers streamlined procedures where the burden and penalties are lower:
- Three years of amended returns, instead of eight years of amended returns for OVDP
- Six years of delinquent FBARs instead of all delinquent FBARs with OVDP
- No miscellaneous penalty for non-residents and five percent penalty for residents versus the 27.5 to 50 percent (if a bank was on the Foreign Financial Institutions or Facilitators list) penalty on the highest aggregate balance with OVDP
An important distinction between the programs; however, is that using the streamlined procedure does not protect a taxpayer from criminal prosecution like OVDP.
Fudging the facts
The streamlined program is a dangerous strategy in many situations. Closely analyzing what caused the omission in relation to the non-willful rules is critical. If you inherited a foreign bank account or a family member set up this type of account for you as a child, you may not have realized there was a filing requirement. This situation will likely satisfy the non-willfulness criteria.
Cases that raise more issues might involve offshore entities registered in placed like Panama, an account only referred to by a nickname or number or significant cash deposits and withdrawals. Accounts that held millions will also trigger more scrutiny. The IRS may question the claim that you “forgot” to tell a tax preparer about the account.
With foreign financial accounts, careful planning is required to return to tax compliance. Mitigate the risk of a criminal investigation down the road by speaking with a skilled tax attorney prior to deciding on next steps.