Time is running out for US citizens and US residents who have offshore bank and financial accounts and have not yet come forward to disclose them to the Internal Revenue Service (IRS). Immediate action should be taken, as under the provisions of the Foreign Account Tax Compliance Act (FATCA), various foreign governments and foreign banks have recently begun systematically sharing with the IRS information about financial accounts held by US persons. FATCA gives the IRS the capacity to root out tax evaders aggressively.
By way of background, US persons with interests in, or signature authority over, foreign bank accounts containing, in the aggregate, more than $10,000 during the year must file a foreign bank account report (FBAR) disclosing those accounts. FBARs are due by June 30th of the following year. The 2015 FBAR will thus be due on June 30, 2016. (Under recent legislation, the deadline will be moved up to April 15th, with a 6-month extension available, beginning with the 2016 FBAR.)
The Department of Justice and the IRS take failures to file FBAR’s very seriously, and the penalties for failing to file can be severe. If you willfully failed to disclose, you could owe a penalty of 50% of your total account balance or $100,000, whichever is greater, for EVERY YEAR out of the last 6 that you failed to file an FBAR. The IRS has recently tried to moderate these penalties by issuing practice guidance to its agents indicating that a one-time penalty of 50% to 100% should be imposed on the highest aggregate balance during such period (instead of 50% for each year during the period, although such a penalty is still draconian). Criminal liability may also be imposed. Non-willful failures carry a penalty of $10,000 a year for EVERY YEAR you do not disclose, up to 6 years.
Fortunately, if you come forward before the government learns about your undisclosed accounts, you may be able to avoid these severe consequences. Under the IRS’s Offshore Voluntary Disclosure Program (OVDP), you would pay 27.5% of your highest combined balance in your foreign bank accounts over the past 8 years, plus tax, interest, and penalties on previously unreported income during that period.
For “non-willful” failures there is the Streamlined Disclosure Program, announced in July 2014, which imposes only a 5% penalty (0% for certain non-resident citizens) on the highest year-end balance in your foreign accounts over the past 6 years. You would pay tax and interest (but no penalties) on previously unreported income over the past 3 years. But the risk is you have to sign a certified statement that your failure to disclose your foreign accounts was non-willful. It should be noted that the “non-willful” standard is poorly defined, so for many US persons with delinquent filings there is a risk that the IRS will challenge your certified statement as to non-willfulness. If the IRS does not accept your certified statement as to non-willfulness, you could be subject to the willful non-disclosure penalties and not be entitled to the protections of the OVDP program.
Taxpayers who are identified by the IRS as having offshore accounts, e.g., because a foreign government or foreign bank has made a disclosure, before they apply to enter a voluntary disclosure program will not be eligible to participate in the OVDP or Steamlined Disclosure Programs and so will not be entitled to any penalty relief.
In a news release issued October 16, 2015, the IRS announced that more than 54,000 taxpayers have already come forward to participate in these and prior offshore disclosure programs, which began in 2009, resulting in the IRS collecting more than $8 billion in taxes, interest, and penalties. US taxpayers with undisclosed offshore accounts should seriously consider the voluntary disclosure programs, because it’s only a matter of time before the IRS finds out through other means, and then it will be too late to avoid the potentially severe consequences.
To navigate this maze of complex rules you need the advice of an experienced international tax professional. Our International Tax Department has the experience to get you back into compliance and ensure proper filings in future years. Please contact Ryan Dudley or David Shuster at Friedman, LLP.