Cryptocurrency IRS Offshore & Foreign Reporting (2018 Update)
- 1 Cryptocurrency – Tax vs. Reporting
- 2 Our Take on the Reporting Rules
- 3 Do I File an FBAR for Cryptocurrency?
- 4 Personal Bank Accounts & Foreign Bank Accounts
- 5 Holding Cryptocurrency on a Foreign Exchange
- 6 Foreign Mutual Fund
- 7 What is Form 8938?
- 8 Form 8621 (PFIC)
- 9 Form 3520
- 10 Risks of Non-Reporting of Cryptocurrency
- 11 What can the IRS Do To Your Money?
- 12 How to Prevent these IRS Tactics?
- 13 IRS Offshore Penalty List
- 13.1 A Penalty for failing to file FBARs
- 13.2 FATCA Form 8938
- 13.3 A Penalty for failing to file Form 3520
- 13.4 A Penalty for failing to file Form 3520-A
- 13.5 A Penalty for failing to file Form 5471
- 13.6 A Penalty for failing to file Form 5472
- 13.7 A Penalty for failing to file Form 926
- 13.8 A Penalty for failing to file Form 8865
- 13.9 Fraud penalties imposed under IRC §§ 6651(f) or 6663
- 13.10 A Penalty for failing to file a tax return imposed under IRC § 6651(a)(1)
- 13.11 A Penalty for failing to pay the amount of tax shown on the return under IRC § 6651(a)(2)
- 13.12 An Accuracy-Related Penalty on underpayments imposed under IRC § 6662
- 13.13 Possible Criminal Charges related to tax matters include tax evasion (IRC § 7201)
- 13.14 A person convicted of tax evasion
- 14 What Should You Do?
- 15 Summary of IRS Offshore Voluntary Disclosure
- 16 Why IRS Voluntary Disclosure?
- 17 4 Types of IRS Offshore Voluntary Disclosure Programs
- 18 IRS Voluntary Disclosure of Offshore Accounts
- 19 When Do I Need to Use Voluntary Disclosure?
- 20 Common Un-filed IRS International Tax Forms
- 21 Golding & Golding – Offshore Disclosure
- 22 The Devil is in the Details…
- 23 What if You Never Report the Money?
- 24 Getting into Compliance
- 25 5 IRS Methods for Offshore Compliance
- 26 1. OVDP
- 27 2. Streamlined Domestic Offshore Disclosure
- 28 3. Streamlined Foreign Offshore Disclosure
- 30 4. Reasonable Cause
Cryptocurrency IRS Offshore & Foreign Reporting (2018 Update)
Unfortunately, at the time of writing of this article, the U.S. government agencies responsible for International and Offshore Reporting (FinCEN and the IRS) have not set any concrete rules reporting the reporting and disclosure of foreign cryptocurrency.
The rules are unclear and misguided at best, and now that the IRS has joined J5 — an international enforcement group dedicated to combatting tax evasion involving cryptocurrency — it is important to do your best to stay (or get into) in IRS compliance.
Cryptocurrency – Tax vs. Reporting
If you are a U.S. Person and would otherwise owe tax money to the IRS due to cryptocurrency sales, exchanges, or capital gain, you are still required to pay tax to the U.S. — even if the sale was abroad.
As to FBAR, FATCA and other international reporting, the IRS has not been completely clear, as the laws are still evolving — but you should keep in mind that in particular, government agencies are not known to play fair.
Just because you do not report now, does not mean in the future that either one of these government agencies will not “look-back” and say you should have reported.
They will say something like, “We never said you definitely did not have to report, all we said is you may not need to report.”
Government agencies are like that…
Our Take on the Reporting Rules
We are going to provide you our take on what needs to be reported. This is not the law; it is just guidance to try and help you make sense of the rules.
We understand that many people want stay anonymous.
Just keep in mind that staying anonymous directly contradicts the goal of the IRS wanting to know all of your financial information (a.k.a. financial transparency).
Whether it is FATCA, CRS (non-U.S. FATCA equivalent law), the IRS joining J5, or the creation of several different ITEG (International Tax Enforcement Groups) – the world in general is moving towards financial transparency.
That does not mean we agree with full financial transparency (we don’t) — it just means the IRS is probably going to err on the side of “it should’ve been reported.”
Do I File an FBAR for Cryptocurrency?
Here is a breakdown of when you may need to report cryptocurrency.
Personal Bank Accounts & Foreign Bank Accounts
No government agency has said for sure, 100% that you have to file an FBAR for Cryptocurrency. If you happen to keep or maintain your cryptocurrency in your own personal wallet then there is a fair argument to be made that you will not have to report the personal wallet unless the IRS specifically says so.
Why? Because a personal wallet is equivalent to having other property/assets in your own “pocket” and unless your pocket is a foreign financial institution, there there really is no way to report it.
Therefore, if it is in a personal wallet and unless the IRS says you have to report personal wallets, you can consider taking the position that you do not have to report it.
Foreign Bank Account for Cryptocurrency
If you have your cryptocurrency in a foreign bank account, for example such as how Binance recently opened its own accounts for cryptocurrency, then the rules are presumably different – and you will probably have to report.
Here’s why: When you have a personal wallet, the idea is that you do not have to report cash you have sitting in your overseas house — only if it is in a financial institution or you meet one of the exceptions such as having your money in a lockbox, in a foreign financial institution that the institution can access.
Therefore, with a personal wallet, while you can make the argument that holding crypto in this type of personal wallet is similar to holding money in your house — which is not reportable — the same would not hold true for a foreign bank account that contains cryptocurrency.
Foreign Bank Accounts are Not Personal Wallets
The IRS never said that holding cryptocurrency in a bank account exempts reporting of that type of foreign bank account. All the IRS has said is that they have not yet promulgated rules re: cryptocurrency reporting.
In other words, there is no rule that says a foreign bank does not have to be reported solely because it holds crypto. Rather, the general rule is that foreign bank accounts have to be reported, and just placing cryptocurrency into a foreign account would not necessarily negate the rule that foreign bank accounts must be reported.
But Gold and Previous Metals are Not FBAR Reportable?
That is only partly correct. If you have gold in your home, then it is not reportable. If you have gold in a bank lockbox in a Foreign Financial Institution that the bank can access, then it may be reportable.
Result: The IRS is not saying foreign bank accounts would not have to be reported if it has cryptocurrency in it. Otherwise, people could avoid reporting by simply depositing some cryptocurrency into a bank account that accepted cryptocurrency deposits. We are pretty sure this was not the IRS and FinCEN’s goal re: compliance.
if you have a foreign bank account holding cryptocurrency, you probably have to report it — or realize if you don’t, the IRS may disagree at a future date and try to issue penalties (which you can fight at that time).
Holding Cryptocurrency on a Foreign Exchange
Here is where it gets a little more complicated.
Some courts have ruled that while some foreign investment accounts and other related accounts need to be reported, others do not. For example, some courts have held that certain types of accounts such as poker accounts may have to be reported in part and not reported in part. See Case: John Hohm
Overall, if you have your cryptocurrency being held on a foreign exchange, and you have an account number and can access the money — the IRS is probably going to say this is considered a foreign account and therefore it should be reported.
Foreign Mutual Fund
We represent numerous entrepreneurs, and some who have begun managing cryptocurrency investment funds abroad, which are pooled funds of different cryptocurrency which is continually being treated and sold. In general, Mutual Funds, ETF, Equity funds and other funds have to be recorded on the FBAR.
Therefore, expanding on the examples from above, if you have an account number designated as part of a pooled fund of cryptocurrency which is being traded and sold — you would be hard pressed to argue that this is not a reportable account when you have sufficient control and access over a foreign fund, in order to withdraw or trade the assets held in the pooled fund.
Unless the IRS specifically exempts cryptocurrency managed fund from reporting, chances are it should be reported.
What is Form 8938?
Form 8938 is related to FATCA. FATCA is the Foreign Account Tax Compliance Act which is an act designed to facilitate reciprocal financial reporting between United States and more than 110 different countries and over 300,000 Foreign Financial Institutions, with the goal of promoting financial transparency and reducing offshore evasion, fraud, money laundering, etc.
Countries are losing out on billions of dollars worth of tax income because offshore income continues to go unreported.
With that said, it is import to understand the concept of financial transparency when determining whether you have reporting requirements with respect to cryptocurrency.
Cryptocurrency is not Currency to the IRS
Under U.S. tax law, the IRS does not deem cryptocurrency as currency. Rather, it is considered property. Therefore, when you are thinking about the term property, one way to think about it is in terms of assets.
Property is a type of Asset.
Likewise, form 8938 requires individuals to report Specified Foreign Financial Assets.
That is your baseline position in determining whether your particular asset (here, cryptocurrency) is the type of asset that must be reported on form 8938.
Examples of Reportable Assets
Some examples of foreign financial assets that are reportable (if the threshold is met) on IRS form 8938 are the following:
- Financial (deposit and custodial) accounts held at foreign financial institutions
- Foreign stock or securities not held in a financial account
- Foreign stock or securities held in a financial account at a foreign financial institution (Not the individual stock)
- Foreign partnership interests
- Foreign-issued life insurance or annuity contract with a cash-value
- Foreign hedge funds and foreign private equity funds
Does Cryptocurrency Qualify as one of these assets?
Cryptocurrency is not a stock or security. Also, it is not a “business” interest, and it is not insurance.
But…How do you Hold Your Cryptocurrency?
Whether or not cryptocurrency qualifies as a reportable foreign financial asset would depend on who you ask (FinCEN vs. IRS) and what the context of the question is.
Unfortunately, there is some ambiguity between the different governing bodies (both domestic and abroad) as to what qualifies as property vs. currency.
Where is your Cryptocurrency being Held?
The biggest hurdle in excluding your cryptocurrency as a non-reportable asset is going to be whether a financial exchange or account is considered a Specified Foreign Financial Asset for purposes of reporting.
Form 8621 (PFIC)
Are You Holding Crypto in a Foreign Investment Fund?
These days, people are getting very creative – which is awesome.
There’s a new breed of Venture Capitalist/Hedge Fund Manager who very creatively uses cryptocurrency as the currency of choice in trading.
If you happen to have your money sitting in a fund abroad, which is being managed by a hedge fund or other venture capitalist/managed fund, chances are you may have to file a Form 8938 and/or possibly a form 8621 if you are inching towards the investment taking shape as a Mutual Fund, ETF, or Foreign Investment fund.
Crypto-Funds May Be a PFIC
A PFIC is a Passive Foreign Investment Company.
The reason why this is important to you is because if your investment fund is considered a PFIC then you will have some significant IRS reporting — depending on whether you meet the threshold reporting requirements or not.
Depending on how long you hold the fund for, and whether you are receiving dividends ,interest capital gains, royalties, etc. — and/or whether the dividends are being accrued (but not distributed) – you may be in for a a very complicated tax analysis, especially if you have excess distributions
IRS Form 3520 is a form that is used to report a gift that is received from a foreign person or foreign business – and is also used when you receive a distribution from a foreign trust.
If you receive cryptocurrency as a gift from a foreign person, or from a foreign business or trust, then chances are you are going to have to report it, assuming it meets the threshold requirements for reporting
Typically, the threshold requirement is that if the value of the gift is more than $100,000 dollars from a foreign person or more than ~$15,000 from a foreign business, then it has to be reported in the year you receive the gift.
The gift does not have to be one transaction, it can be a series of transactions.
**If you have a foreign trust involving Cryptocurrency, you may need to consider a Form 3520-A
Risks of Non-Reporting of Cryptocurrency
A CTR is a Currency Transaction Report. It’s typically filed when the bank receive deposits of more than $10,000. Therefore, if you have several transactions of more than $10,000 of cryptocurrency hitting your account from a foreign exchange, or other owner of cryptocurrency, you may have to be careful about non-reporting.
So can’t I just receive deposits of less than $10,000?
Don’t Forget About… SAR
The US government already knows your immediate knee-jerk reaction of knowing that a CTR is filed when a person deposits more than $10,000 is to deposit less than $10,000.
Therefore, the alternative form a Financial Institution may file is called the Suspicious Activity Report (SAR).
This form is filed when a person at the institution believes that some of the deposits or related transactions are suspicious. Therefore, even if depositing $9000 into your account may not necessarily lead to a CTR being filed, the bank may still file an SAR – which would lead to more inquiries because while a CTR is more routine, an SAR says that the institution smells trouble.
What can the IRS Do To Your Money?
Here are a few common tactics the IRS will use:
The IRS can issue a levy against your bank account with the intent to take all of the money sufficient to recoup the penalties against you (plus interest). You have the opportunity to dispute the Levy, but it is crucial that you respond notice of intent To levy in a timely manner. Also, if the foreign money is already spent the IRS can still go after other money – in other words, the IRS is not limited to only trying to levy the actual foreign money that was transferred to the United States.
In order to recoup penalties the irises issued against you, the IRS can also lien your property. Typically, the IRS does not force the sale of the home, but it is a possibility, although very unlikely. In addition, as with the levy, the IRS is not limited to property that was purchased with the foreign money. The IRS can lien whatever property necessary to recoup the penalties due and owing.
A seizure is a more complicated scenario, because with the seizure the IRS does not give sufficient notice or “pre-warning” — so that you do not have time to move the asset before the IRS “seizes it.” This method is typically intended for individuals who a laundering large amounts of money, and/or are criminals, or intending to go on the run.
How to Prevent these IRS Tactics?
One of the most effective methods for getting into compliance (and also legal) is through one of the approved IRS Offshore Voluntary Disclosure Programs.
But, since one of the main programs is set to be terminated in the upcoming months (9/28/2018) it is important to speak with an experienced offshore disclosure lawyer, sooner as opposed to later.
IRS Offshore Penalty List
The following is a list of potential IRS penalties for unreported and undisclosed foreign accounts and assets:
A Penalty for failing to file FBARs
United States citizens, residents and certain other persons must annually report their direct or indirect financial interest in, or signature authority (or other authority that is comparable to signature authority) over, a financial account that is maintained with a financial institution located in a foreign country if, for any calendar year, the aggregate value of all foreign financial accounts exceeded $10,000 at any time during the year. The civil penalty for willfully failing to file an FBAR can be as high as the greater of $100,000 or 50 percent of the total balance of the foreign financial account per violation. See 31 U.S.C. § 5321(a)(5). Non-willful violations that the IRS determines were not due to reasonable cause are subject to a $10,000 penalty per violation.
FATCA Form 8938
Beginning with the 2011 tax year, a penalty for failing to file Form 8938 reporting the taxpayer’s interest in certain foreign financial assets, including financial accounts, certain foreign securities, and interests in foreign entities, as required by IRC § 6038D. The penalty for failing to file each one of these information returns is $10,000, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50,000 per return.
A Penalty for failing to file Form 3520
Annual Return to Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts. Taxpayers must also report various transactions involving foreign trusts, including creation of a foreign trust by a United States person, transfers of property from a United States person to a foreign trust and receipt of distributions from foreign trusts under IRC § 6048. This return also reports the receipt of gifts from foreign entities under IRC § 6039F. The penalty for failing to file each one of these information returns, or for filing an incomplete return, is the greater of $10,000 or 35 percent of the gross reportable amount, except for returns reporting gifts, where the penalty is five percent of the gift per month, up to a maximum penalty of 25 percent of the gift.
A Penalty for failing to file Form 3520-A
Information Return of Foreign Trust With a U.S. Owner. Taxpayers must also report ownership interests in foreign trusts, by United States persons with various interests in and powers over those trusts under IRC § 6048(b). The penalty for failing to file each one of these information returns or for filing an incomplete return, is the greater of $10,000 or 5 percent of the gross value of trust assets determined to be owned by the United States person.
A Penalty for failing to file Form 5471
Information Return of U.S. Persons with Respect to Certain Foreign Corporations. Certain United States persons who are officers, directors or shareholders in certain foreign corporations (including International Business Corporations) are required to report information under IRC §§ 6035, 6038 and 6046. The penalty for failing to file each one of these information returns is $10,000, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50,000 per return.
A Penalty for failing to file Form 5472
Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business. Taxpayers may be required to report transactions between a 25 percent foreign-owned domestic corporation or a foreign corporation engaged in a trade or business in the United States and a related party as required by IRC §§ 6038A and 6038C. The penalty for failing to file each one of these information returns, or to keep certain records regarding reportable transactions, is $10,000, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency.
A Penalty for failing to file Form 926
Return by a U.S. Transferor of Property to a Foreign Corporation. Taxpayers are required to report transfers of property to foreign corporations and other information under IRC § 6038B. The penalty for failing to file each one of these information returns is ten percent of the value of the property transferred, up to a maximum of $100,000 per return, with no limit if the failure to report the transfer was intentional.
A Penalty for failing to file Form 8865
Return of U.S. Persons With Respect to Certain Foreign Partnerships. United States persons with certain interests in foreign partnerships use this form to report interests in and transactions of the foreign partnerships, transfers of property to the foreign partnerships, and acquisitions, dispositions and changes in foreign partnership interests under IRC §§ 6038, 6038B, and 6046A. Penalties include $10,000 for failure to file each return, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50,000 per return, and ten percent of the value of any transferred property that is not reported, subject to a $100,000 limit.
Fraud penalties imposed under IRC §§ 6651(f) or 6663
Where an underpayment of tax, or a failure to file a tax return, is due to fraud, the taxpayer is liable for penalties that, although calculated differently, essentially amount to 75 percent of the unpaid tax.
A Penalty for failing to file a tax return imposed under IRC § 6651(a)(1)
Generally, taxpayers are required to file income tax returns. If a taxpayer fails to do so, a penalty of 5 percent of the balance due, plus an additional 5 percent for each month or fraction thereof during which the failure continues may be imposed. The penalty shall not exceed 25 percent.
A Penalty for failing to pay the amount of tax shown on the return under IRC § 6651(a)(2)
If a taxpayer fails to pay the amount of tax shown on the return, he or she may be liable for a penalty of .5 percent of the amount of tax shown on the return, plus an additional .5 percent for each additional month or fraction thereof that the amount remains unpaid, not exceeding 25 percent.
An Accuracy-Related Penalty on underpayments imposed under IRC § 6662
Depending upon which component of the accuracy-related penalty is applicable, a taxpayer may be liable for a 20 percent or 40 percent penalty
Filing a false return (IRC § 7206(1)) and failure to file an income tax return (IRC § 7203). Willfully failing to file an FBAR and willfully filing a false FBAR are both violations that are subject to criminal penalties under 31 U.S.C. § 5322. Additional possible criminal charges include conspiracy to defraud the government with respect to claims (18 U.S.C. § 286) and conspiracy to commit offense or to defraud the United States (18 U.S.C. § 371).
A person convicted of tax evasion
Filing a false return subjects a person to a prison term of up to three years and a fine of up to $250,000. A person who fails to file a tax return is subject to a prison term of up to one year and a fine of up to $100,000. Failing to file an FBAR subjects a person to a prison term of up to ten years and criminal penalties of up to $500,000. A person convicted of conspiracy to defraud the government with respect to claims is subject to a prison term of up to not more than 10 years or a fine of up to $250,000. A person convicted of conspiracy to commit offense or to defraud the United States is subject to a prison term of not more than five years and a fine of up to $250,000.
What Should You Do?
Everyone makes mistakes. If at some point that you should have been reporting your foreign income, accounts, assets or investments the prudent and least costly (but most effective) method for getting compliance is through one of the approved IRS offshore voluntary disclosure program.
Summary of IRS Offshore Voluntary Disclosure
IRS Voluntary Disclosure of Foreign or Offshore Accounts is a legal method for getting into IRS Tax and Reporting compliance before the IRS finds you first. At Golding & Golding, we limit our entire tax law practice to IRS Offshore Voluntary Disclosure.
Why IRS Voluntary Disclosure?
With the introduction and enforcement of FATCA (Foreign Account Tax Compliance Act) and FATCA penalties, coupled by the renewed interest in the IRS issuing FBAR (Report of Foreign Bank and Financial Account Form aka FinCEN 114) penalties — which are both very steep – it is typically a better strategy to be proactive and get into compliance, than to play “defense.”
FBAR penalties alone can reach ~$12,500 per account, per year (adjusted inflation from $10,000). While this is the maximum penalty, the “recommended penalty” is still $12,500 per year (usually 3-6 years).
4 Types of IRS Offshore Voluntary Disclosure Programs
There are typically four types of IRS Offshore Voluntary Disclosure programs, and they include:
- Offshore Voluntary Disclosure Program (OVDP)
- Streamlined Domestic Offshore Procedures (SDOP)
- Streamlined Foreign Offshore Procedures (SFOP)
- Reasonable Cause (RC)
IRS Voluntary Disclosure of Offshore Accounts
Offshore Voluntary Disclosure Tax law is very complex. There are many aspects that go into any particular tax calculation, including the legal status, marital status, business status and residence status of the taxpayer.
When Do I Need to Use Voluntary Disclosure?
Voluntary Disclosure is for individuals, estates, and businesses who are out of compliance with the IRS and the Department of Treasury. What does that mean? It means that for one or more years, you were required to file a U.S. tax return, FBAR or other International Informational Return and you did not do so timely, then you are out of compliance.
Common Un-filed IRS International Tax Forms
Common un-filed international tax forms, include:
- 1040 (Tax Returns)
- Schedule B (Ownership or Signature Authority over Foreign Accounts)
- FBAR (FinCEN 114)
- FATCA (Form 8938)
- Form 3520 (Gift from Foreign Person)
- Form 5471 (Foreign Corporations)
- Form 8621 (Foreign Investments, aka PFIC)
- Form 8865 (Foreign Partnership)
If the IRS discovers that you are out of compliance, you may become subject to extensive fines and penalties – ranging from a warning letter all the way up to tax liens, tax levies, seizures, and criminal investigations. To combat this, you can take the proactive approach and submit to IRS Offshore Voluntary Disclosure.
Golding & Golding – Offshore Disclosure
At Golding & Golding, we limit our entire practice to offshore disclosure (IRS Voluntary Disclosure of Foreign and U.S. Assets). The term offshore disclosure is a bit of a misnomer, because the term “offshore” generally connotes visions of hiding money in secret places such as the Cayman Islands, Bahamas, Malta, or any other well-known tax haven jurisdiction – but that is not the case.
In fact, any money that is outside of the United States is considered to be offshore; the term offshore is not a bad word. In other words, merely because a person has money offshore (a.k.a. overseas or in a foreign country) does not mean that money is the result of ill-gotten gains or that the money is being “hidden.”
It just means it is not in the United States. Many of our clients have assets and bank accounts in their homeland countries and these are considered offshore assets and offshore bank accounts.
The Devil is in the Details…
If you do have money offshore, then it is very important to ensure that the money has been properly reported to the U.S. government. In addition, it is also very important to ensure that if you are earning any foreign income from that offshore money, that the earnings are being reported on your U.S. tax return.
It does not matter whether your money is in a country that does not tax a particular category of income (for example, many Asian countries do not tax passive income). It also does not matter if you are a dual citizen and/or if that money has already been taxed in the foreign country.
Rather, the default position is that if you are required to file a U.S. tax return and you meet the minimum threshold requirements for filing a U.S. tax return, then you have to include all of your foreign income. If you already paid foreign tax on the income, you may qualify for a Foreign Tax Credit. In addition, if the income is earned income – as opposed to passive income – and you meet either the Bona-Fide Resident Test or Physical-Presence Test, then you may qualify for an exclusion of that income; nevertheless, the money must be included on your tax return.
What if You Never Report the Money?
If you are in the unfortunate position of having foreign money or specified foreign assets that should have been reported to the U.S. government, but which you have not reported — then you are in a bit of a predicament, which you will need to resolve before it is too late.
As we have indicated numerous times on our website, there are very unscrupulous CPAs, Attorneys, Accountants, and Tax Representatives who would like nothing more than to get you to part with all of your money by scaring you into believing you are automatically going to be arrested, jailed, or deported because you have unreported money. While that is most likely not the case (depending on the facts and circumstances of your specific situation), you may be subject to extremely high fines and penalties.
Moreover, if you knowingly or willfully hid your foreign accounts, foreign money, and offshore assets overseas, then you may become subject to even higher fines and penalties…as well as a criminal investigation by the special agents of the IRS and/or DOJ (Department of Justice).
Getting into Compliance
There are five main methods people/businesses use to get into compliance. Four of these methods are perfectly legitimate as long as you meet the requirements for the particular mechanism of disclosure. The fifth alternative, which is called a Quiet Disclosure a.k.a. Silent Disclosure a.k.a. Soft Disclosure, is ill-advised as it is illegal and very well may result in criminal prosecution.
5 IRS Methods for Offshore Compliance
- Streamlined Domestic Offshore Procedures
- Streamlined Foreign Offshore Procedures
- Reasonable Cause
- Quiet Disclosure (Illegal)
We are going to provide a brief summary of each program below. We have also included links to the specific programs. If you are interested, we have also prepared very popular “FAQs from the Trenches” for FBAR, OVDP and Streamlined Disclosure reporting. Unlike the technical jargon of the IRS FAQs, our FAQs are based on the hundreds of different types of issues we have handled over the many years that we have been practicing international tax law and offshore disclosure in particular.
After reading this webpage, we hope you develop a basic understanding of each offshore disclosure alternative and how it may benefit you to get into compliance. We do not recommend attempting to disclose the information yourself as you may become subject to an IRS investigation insofar as you will have to answer questions directly to the IRS, which you can avoid with an attorney representative.
If you retain an attorney, then you will get the benefit of the attorney-client privilege which provides confidentiality between you and your representative. With a CPA, there is a relatively small privilege which does provide some comfort, but the privilege is nowhere near as strong as the confidentiality privilege you enjoy with an attorney.
Since you will be dealing with the Internal Revenue Service and they are not known to play nice or fair – it is in your best interest to obtain an experienced Offshore Disclosure Attorney.
OVDP is the Offshore Voluntary Disclosure Program — a program designed to facilitate taxpayer compliance with IRS, DOT, and DOJ International Tax Reporting and Compliance. It is generally reserved for individuals and businesses who were “Willful” (aka intentional) in their failure to comply with U.S. Government Laws and Regulations.
The Offshore Voluntary Disclosure Program is open to any US taxpayer who has offshore and foreign accounts and has not reported the financial information to the Internal Revenue Service (restrictions apply). There are some basic program requirements, with the main one being that the person/business who is applying under this amnesty program is not currently under IRS examination.
The reason is simple: OVDP is a voluntary program and if you are only entering because you are already under IRS examination, then technically, you are not voluntarily entering the program – rather, you are doing so under duress.
Any account that would have to be included on either the FBAR or 8938 form as well as additional income generating assets such as rental properties are accounts that qualify under OVDP. It should be noted that the requirements are different for the modified streamlined program, in which the taxpayer penalties are limited to only assets that are actually listed on either an FBAR or 8938 form; thus the value of a rental property would not be calculated into the penalty amount in a streamlined application, but it would be applicable in an OVDP submission.
An OVDP submission involves the failure of a taxpayer(s) to report foreign and overseas accounts such as: Foreign Bank Accounts, Foreign Financial Accounts, Foreign Retirement Accounts, Foreign Trading Accounts, Foreign Insurance, and Foreign Income, including 8938s, FBAR, Schedule B, 5741, 3520, and more.
What is Included in the Full OVDP Submission?
The full OVDP application includes:
- Eight (8) years of Amended Tax Return filings;
- Eight (8) Years of FBAR (Foreign Bank and Account Reporting Statements);
- Penalty Computation Worksheet; and
- Various OVDP specific documents in support of the application.
Under this program, the Internal Revenue Service wants to know all of the income that was generated under these accounts that were not properly reported previously. The way the taxpayer accomplishes this is by amending tax returns for eight years.
Generally, if the taxpayer has not previously reported his accounts, then there are common forms which were probably excluded from the prior year’s tax returns and include 8938 Forms, Schedule B forms, 3520 Forms, 5471 Forms, 8621 Forms, as well as proof of filing of FBARs (Foreign Bank and Financial Account Reports).
The taxpayer is required to pay the outstanding tax liability for the eight years within the disclosure period – as well as payment of interest along with another 20% penalty on that amount (for nonpayment of tax). To give you an example, let’s pick one tax year during the compliance period. If the taxpayer owed $20,000 in taxes for year 2014, then they would also have to include in the check the amount of $4,000 to cover the 20% penalty, as well as estimated interest (which is generally averaged at about 3% per year). This must be done for each year during the compliance period.
Then there is the “FBAR/8938” Penalty. The Penalty is 27.5% (or 50% if any of the foreign accounts are held at an IRS “Bad Bank”) on the highest year’s “annual aggregate total” of unreported accounts (accounts which were previously reported are not calculated into the penalty amount).
For OVDP, the annual aggregate total is determined by adding the “maximum value” of each unreported account for each year, in each of the last 8 years. To determine what the maximum value is, the taxpayer will add up the highest balances of all of their accounts for each year. In other words, for each tax year within the compliance period, the application will locate the highest balance for each account for each year, and total up the values to determine the maximum value for each year.
Thereafter, the OVDP applicant selects the highest year’s value, and multiplies it by either 27.5%, or possibly 50% if any of the money was being held in what the IRS considers to be one of the “bad banks.” When a person is completing the penalty portion of the application, the two most important things are to breathe and remember that by entering the program, the applicant is seeking to avoid criminal prosecution!
2. Streamlined Domestic Offshore Disclosure
The Streamlined Domestic Offshore Disclosure Program is a highly cost-effective method of quickly getting you into IRS (Internal Revenue Service) or DOT (Department of Treasury) compliance.
What am I supposed to Report?
There are three main reporting aspects: (1) foreign account(s), (2) certain specified assets, and (3) foreign money. While the IRS or DOJ will most likely not be kicking in your door and arresting you on the spot for failing to report, there are significantly high penalties associated with failing to comply.
In fact, the US government has the right to penalize you upwards of $10,000 per unreported account, per year for a six-year period if you are non-willful. If you are determined to be willful, the penalties can reach 100% value of the foreign accounts, including many other fines and penalties… not the least being a criminal investigation.
Reporting Specified Foreign Assets – FATCA Form 8938
Not all foreign assets must be reported. With that said, a majority of assets do have to be reported on a form 8938. For example, if you have ownership of a foreign business interest or investment such as a limited liability share of a foreign corporation, it may not need to be reported on the FBAR but may need to be disclosed on an 8938.
The reason why you may get caught in the middle of whether it must be filed or not is due largely to the reporting thresholds of the 8938. For example, while the threshold requirements for the FBAR is when the foreign accounts exceed $10,000 in annual aggregate total – and is not impacted by marital status and country of residence – the same is not true of the 8938.
The threshold requirements for filing the 8938 will depend on whether you are married filing jointly or married filing separate/single, or whether you are considered a US resident or foreign resident.
Other Forms – Foreign Business
While the FBAR and Form 8938 are the two most common forms, please keep in mind that there are many other forms that may need to be filed based on your specific facts and circumstances. For example:
- If you are the Beneficiary of a foreign trust or receive a foreign gift, you may have to file Form 3520.
- If you are the Owner of a foreign trust, you will also have to file Form 3520-A.
- If you have certain Ownerships of a foreign corporation, you have to file Form 5471.
- And (regrettably) if you fall into the unfortunate category of owning foreign mutual funds or any other Passive Foreign Investment Companies then you will have to file Form 8621 and possibly be subject to significant tax liabilities in accordance with excess distributions.
Reporting Foreign Income
If you are considered a US tax resident (which normally means you are a US citizen, Legal Permanent Resident/Green-Card Holder or Foreign National subject to US tax under the substantial presence test), then you will be taxed on your worldwide Income.
It does not matter if you earned the money in a foreign country or if it is the type of income that is not taxed in the country of origin such as interest income in Asian countries. The fact of the matter is you are required to report this information on your US tax return and pay any differential in tax that might be due.
In other words, if you earn $100,000 USD in Japan and paid 25% tax ($25,000) in Japan, you would receive a $25,000 tax credit against your foreign earnings. Thus, if your US tax liability is less than $25,000, then you will receive a carryover to use in future years against foreign income (you do not get a refund and it cannot be used against US income). If you have to pay the exact same in the United States as you did in Japan, it would equal itself out. If you would owe more money in the United States than you paid in Japan on the earnings (a.k.a. you are in a higher tax bracket), then you have to pay the difference to the U.S. Government.
3. Streamlined Foreign Offshore Disclosure
What do you do if you reside outside of the United States and recently learned that you’re out of US tax compliance, have no idea what FATCA or FBAR means, and are under the misimpression that you are going to be arrested and hauled off to jail due to irresponsible blogging by inexperienced attorneys and accountants?
If you live overseas and qualify as a foreign resident (reside outside of the United States for at least 330 days in any one of the last three tax years or do not meet the Substantial Presence Test), you may be in for a pleasant surprise.
Even though you may be completely out of US tax and reporting compliance, you may qualify for a penalty waiver and ALL of your disclosure penalties would be waived. Thus, all you will have to do besides reporting and disclosing the information is pay any outstanding tax liability and interest, if any is due. (Your foreign tax credit may offset any US taxes and you may end up with zero penalty and zero tax liability.)
*Under the Streamlined Foreign, you also have to amend or file 3 years of tax returns (and 8938s if applicable) as well as 6 years of FBAR statements just as in the Streamlined Domestic program.
4. Reasonable Cause
Reasonable Cause is different than the above referenced programs. Reasonable Cause is not a “program.” Rather, it is an alternative to traditional Offshore Voluntary Disclosure, which should be considered on a case by case basis, taking the specific facts and circumstances into consideration.
Contact us Today, Let us Help.
Sean holds a Master's in Tax Law from one of the top Tax LL.M. programs in the country at the University of Denver, and has also earned the prestigious Enrolled Agent credential. Mr. Golding is also a Board Certified Tax Law Specialist Attorney (A designation earned by Less than 1% of Attorneys nationwide.)
Latest posts by International Tax Lawyers - Golding & Golding, A PLC (see all)
- IRS Offshore Amnesty 2019 – Learn Why You Should You Disclose Now - April 21, 2019
- Courts Reject Kovel – No Attorney-Client Privilege for the Accountant - April 14, 2019
- Numbered Bank Accounts – IRS Risk of Overseas Anonymous Money - April 12, 2019