Recently, we have worked with several new clients who found themselves in the same situation: they learned about the FBAR on or around June 30, 2016 and hastily submitted an FBAR.
Thereafter, they researched “Offshore Disclosure,” “FBAR Penalties,” “Unreported Foreign Accounts,” “Criminal Tax” and similar keywords on Google, burrowed down into various different rabbit holes, and came to the ultimate conclusion that they were about to be raided by the IRS, handcuffed, dragged away from their family and left to rot in a prison cell…all because they did not report their foreign account information.
As a result, (and often because clients in this situation feel ashamed and scared) they quickly rushed into the Streamlined Disclosure Program and drafted their own streamlined certification statement. This is a horrible idea.
Why? Because if you draft your own statement without having an experienced offshore disclosure attorney represent you, you may be opening up a Pandora’s box of problems you never anticipated – which could have easily been avoided.
The problem is that often times people will say things in a statement to try to elicit sympathy for their cause, when in fact they have inadvertently admitted to being willful. Worse yet, many of these individuals were clearly non-willful, but the verbiage they used in drafting the certification statement makes their explanation sound unclear and ambiguous.
Now, not only may they be rejected from the streamlined program, but they may also face a special agent investigation by the IRS.
Pitfalls – Self-Prepared Streamlined Program
David: David is from India and currently resides in the United States on an H1B visa. He and his wife have applied for legal permanent resident status (“Green Card”) but the USCIS is backlogged and they have not reached I-485 status yet. One night while out to dinner, they speak with some friends only to learn that they are required to file something called an FBAR (Report of Foreign Banks And Financial Account). As any of us could imagine, David begins to feel scared and uneasy.
Due to misinformation (Read: the “Telephone Game” you played in elementary school) that is continually circulated online by vultures and other salespeople trying to part you from your wallet, David is under the misimpression that he will be penalized 50% of his account value and possibly face jail time.
Why? Because the first attorney David’s friend spoke with scared him into believing that he was willful and that unless he applies for OVDP (Essentially for people who committed tax fraud or tax evasion), he will be going to jail.
When David returns home, he does more research and learns about the streamlined disclosure program. He visits various online Expat Forums where they make it seem like anyone can submit to the streamlined program and “who needs an attorney.” As a result, David quickly slaps together amended tax returns and essentially “pours his heart out” into a streamlined certification letter.
…Why This was a Horrible Idea
First, David is not an Enrolled Agent nor CPA. He is not experienced in preparing tax returns and is unaware of the international tax laws. For example, David is the owner of a foreign mutual fund that has upwards of $100,000 in it. Moreover, the fund has been paying significantly increased dividends over the last year and may qualify as an excess distribution, which requires a comprehensive tax analysis and preparation of form 8621.
Second, by preparing the amended tax returns himself, David has no one to assist him and/or rely upon if the forms (1040X, FBAR) are incorrect. In other words, if the IRS thinks that not only did you incorrectly prepare your taxes on the first go around, but then you did not use a professional and “messed up” again, it could spell trouble.
Third and most importantly, you never want to admit anything to any government agency. Any first-year law school student (or anybody who has ever watched 48 hours) will tell you that you never speak to the police because anything you say can be used against you.
With that said, while the Internal Revenue Service is not the police — they do have the power and authority to initiate a criminal investigation by assigning special agents to your case. Moreover, the special agents will intimidate you and usually gets you to admit facts that may not be true.
The IRS Streamlined Program – Get Represented!
The following is a list of frequently asked questions we are prepared after numerous years of offshore disclosure applications. We are one of the most prolific firms in the country that handles these types of matters. We have successfully represented individuals with unreported funds ranging from $50,000 or so to over $35,000,000.
The purpose of these FAQs is not to act as a roadmap for you to do it yourself. Rather, the point of these FAQs is to illustrate the complexity program, as well as dangers and pitfalls you may be facing when you submit to this program.
We receive telephone calls daily from clients who tell me they first spoke with a CPA and the CPA told them they were low risk, so why would they hire an attorney? We tell them how that’s easy to say for someone who’s never submitted to the program themselves or has never been audited. Moreover, a CPA does not have any Attorney-Client privilege with you and cannot represent you in a criminal investigation; thus, if their application is denied, they will not be standing with you to fight the IRS allegations. In other words, when the going gets tough, the CPA cannot help you and therefore will not be liable to stand by their earlier representations to you.
Once the IRS had you in its crosshairs it can be very difficult to get out and therefore is only recommended that you use an experienced offshore disclosure turning to assist you in submitting even the most basic streamlined disclosure application.
Streamlined Program FAQ
The following is a list of FAQs (Frequently Asked Questions), pitfalls, and tips from the Tax Lawyers at Golding & Golding. Our firm is one of the only boutique tax law firms in the country that is focused exclusively on International Offshore Disclosure Tax Law, and we have handled a diverse range of streamlined program applications ranging from under $100,000 to nearly $40,000,000.
This is a summary of common Streamlined Program Questions we receive often. It does NOT constitute legal advice that can be relied upon as legal advice for your particular situation, since each person’s circumstances are unique and may impact the determination of whether he/she qualifies for the program.
How do I know if I Was Willful?
In reality, there is no concrete definition of the term Willful or Non-Willful. It is essentially a ‘smell test’ based on whether or not the facts and circumstances show that you knew, or had any reason to know that you are required to disclose and report your foreign accounts and offshore income — and made the decision not to disclose. It is really that simple and for most people, if they did not know that there was a reporting requirement, then they could not have known that they were required to report the accounts/income — and would therefore fall into the “non-willful” category.
What if the IRS disagrees and Believes I was Willful?
This is a good question and without sounding like a salesperson, this is why you retain an experienced international tax lawyer to represent you throughout the application process. Yes, CPAs, Enrolled Agents and general practitioners will try to sell you that they can do it for “cheaper” and that you are “low-risk”, but once the IRS starts auditing individuals who are in the program, you will be a much better position (mentally and physically) to know you are being represented by an experienced International Tax Attorney (covered by the attorney-client privilege).
Is there No Attorney-Client Privilege with a Non-Attorney?
If you are being represented by a non-attorney, then there is no attorney client privilege. There is a very limited privilege with a CPA or Enrolled Agent, but if it turns out the IRS believes you were willful and wants to pursue a criminal investigation against you, the CPA or enrolled agent can be forced to submit to an examination by the IRS (unless the CPA or Enrolled Agent is also an attorney).
Which Three (3) Years of Tax Returns do I have to Amend?
Generally, it has to be the last three years of tax returns that were filed. So for example, in January 2016 you decide you want to enter the program, you would amend your tax returns for tax year 2014, tax year 2013, tax year 2012. Alternatively, if you were to file your 2015 tax return timely and accurately (disclosing the information), then you could submit an original 2015 with the application as well as an amended 2014 and 2013 tax return.
On my Original Schedule B I Indicated I had no Foreign Accounts?
This is where many people start to “ride the line” between willful and non-willful. The fact of the matter is there are many reasons that we have come across in our practice as to why a person would indicate they did not have foreign accounts on the Schedule B when in fact they did – and would still be considered non-willful. Thus, if the only reason you believe you were willful is because of how you or your CPA/Accountant responded on schedule B, it may be in your best interest to contact an experienced streamlined disclosure lawyer to discuss.
I received a FATCA Letter, now what?
When you receive a FATCA Letter (Foreign Account Tax Compliance Act), it is important to realize that the clock has already started ticking. It means that the foreign financial institution/foreign bank is probably going to report your information to the United States, and when the IRS learns that you have outstanding foreign accounts that have not been reported on your tax return, it could lead to an audit or examination which may prevent your ability to enter the program.
I Cannot Locate All of my Account Information
If you are unable to find all of your account information, the most important information to obtain is the year-end balances. That is because it is the year-end balances that are utilized by the IRS to determine what your penalty will be (unless you qualify for a penalty abatement). Thus, while many foreign countries do not hold account information for more than three years and/or charge ridiculous fees for you to obtain the information — you can usually obtain the year-end information.
I do not Have to Pay Tax on These Accounts Overseas?
Welcome to the United States. If you are entering the streamlined program it is because you are required to file your taxes as if you were a US citizen and you are taxed on your Worldwide Income. Thus, as a US citizen, Legal Permanent Resident, or Foreign National otherwise subject to US income tax on a 1040 you are required to file a US tax return and report all of your foreign earnings. Just because you are not taxed on passive income in the country in which the accounts were held, that does not mean the income is tax-free in the United States. In fact, they are usually taxable under IRS Tax Law — but if you have already paid foreign tax you may qualify for the foreign tax credit.
I already Paid Taxes on These Earnings Overseas?
Even if you have already paid tax on the foreign earnings overseas you still must report the information and disclose the earnings on your US tax return. But, when you disclose the account information you also claim what is referred to as an FTC (Foreign Tax Credit). In other words, while you are required to disclose the information regarding your foreign taxes, it does not mean you are subject to double taxation – you get a ‘Foreign Tax Credit’ for taxes you already paid.
Are There Penalties on the Outstanding Tax Liability?
No. Unlike the Offshore Voluntary Disclosure Program (OVDP) in which you have to amend your tax returns for eight (8) years as well as paid 20% penalty on the total outstanding tax liability, under the streamlined program there is no additional penalty for the taxes; rather, there is a 5% penalty on the year-end account balances.
How is the 5% Penalty Calculated?
The penalties calculated as follows: a person will total their year-end balances for each year of the last six years. If you are in the streamlined program this does not include the value of unreported foreign real estate which generates real estate income. Thus, once you have the annual aggregate total of your foreign accounts for each year in the last six years, you pick the highest year-end total, multiply it by .05 (5%) and that will be your penalty. In addition to this penalty, you also have to pay any additional tax liability for the last three years that result from amending the tax return (if there is any taxes due) as well as interest on the taxes.
I live Overseas, Do I Qualify for the IRS Penalty Waiver?
The IRS Streamlined Program carved out a very small niche for foreigners who meet very specific residence requirements. In other words, if you reside overseas for at least 330 days in any one of the last three tax years in which you are filing an amended tax return, then you may qualify to have your 5% penalty abated. It is important to understand that this is not the same as the Foreign Earned Income Exclusion Test and the FEIF Bona-Fide Residence Exception under IRC 2555 does not apply (Click here for recent article we authored on this subject)
Is my Foreign Real Estate Calculated into the Equation?
This can become a very complicated discussion, but keeping it simple it goes like this: if you as an Individual own foreign real estate that generated income and you qualify for the streamlined program, the value of the real estate is not included in the penalty competition. In OVDP the value of foreign real estate that generates income is included in the penalty computation .
To complicate matters, if you own foreign real estate within an investment such as a foreign mutual fund or possibly a foreign self-directed IRA, then the value of the account will include all the investments held in the mutual fund and if that includes foreign real estate then you may indirectly be subject to a penalty on that foreign real estate.
*If you are in this type of situation, you should consider speaking when experienced international tax lawyer before making any submission.
What Type of Accounts Must be Reported?
Generally, all foreign accounts must be reported. For example, Foreign Account reporting would generally include: Foreign Bank Accounts, Foreign Savings Accounts, Foreign Investment Accounts, Foreign Securities Accounts, Foreign Mutual Funds, Foreign Trusts, Foreign Retirement Plans, Foreign Business and/or Corporate Accounts, Insurance Policies (including some Life Insurance), Foreign Accounts held in a CFC (Controlled Foreign Corporation), and Foreign Accounts held in a PFIC (Passive Foreign Investment Company)
Must Foreign Insurance Policies be Reported?
If there is a surrender value, then generally insurance policy must be reported. Foreign life insurance and life assurance policies generally have an investment mechanism to them, which provides monthly, quarterly or annual interest/bonus payments – as well as a surrender value – and if so, the policy must be reported.
What if I am Under IRS Audit or Examination?
If you are currently under IRS audit or examination, than you generally will be disqualified from the program. The idea is that the streamlined program and OVDP are voluntary programs and once you are under audit you are no longer acting “voluntarily.”
Of course, not every IRS agent is fully aware of the parameters of the program and once you receive the notice of audit letter from the IRS it may not hurt you to try to submit to the program but it can cause a major issue depending on whether the audit has anything to do with for accounts and other very personal and confidential information.
*There seems to be some inexperienced CPA and “International” Tax Attorneys who do not have any litigation or actual law practice experience (or are CPA/Lawyers who try to combine their CPA/Attorney experience when they really have less than 10-15 years of Attorney experience and not understand the ramifications of their advice. These attorneys are motivated by the “dollar” and are all too quick to submit their client to the streamlined program after their client has already received a notice of audit or examination — just to make a quick buck.
**If the Attorney/CPA/Enrolled Agent does not properly vet the facts and circumstances of their clients unreported information, the client may face serious inquiries and the CPA/Enrolled Agent may be forced to submit to IRS questioning.
What is a Reasonable Cause Statement?
As an alternative to the streamlined program, some individuals opt to just submitting all of the prior documentation that was not previously disclosed or reported, along with a statement detailing why they have reasonable cause for failing to do so. This is a risky move, because by doing so the person is disclosing all of their financial information to the Internal Revenue Service without any guarantee of non-prosecution. Since the penalties for failing to file and FBAR are exorbitant and even the non-willful person can be subject to a $10,000 per account penalty per year the applicant must bec careful.
But I have no tax liability?
The threshold requirement is not whether you owe tax based on foreign earnings and foreign accounts, but whether you properly disclosed your foreign accounts and income. In other words, if you have foreign income from your bank but there also bank fees which reduces your foreign interest income to zero, that does not mean do not have to report and the failure to report the account and the “money” that was generated from the account is the problem and would still require disclosure. It also will not exempt you from tax and account reporting requirements.
What is Quiet Disclosure/Silent Disclosure
Honestly, it is a horrible idea to submit documents to the IRS via a Quiet Disclosure or Silent Disclosure. These type to disclosures occur when a person simply goes back and reports/discloses the accounts without entering any program or submitting a reasonable cause statement. If a person does this, than they may be subject to criminal prosecution. But if you have already done so you can still get right by the IRS and submit under the streamlined program if you are non-willful (there are some people who inadvertently filed a quiet disclosure or silent disclosure because they were did not know they were required to even submit to a program or pay a penalty)
Does my Foreign Inheritance Count Toward the Penalty?
Yes. A distinction must be made between estate tax, income tax and reporting requirements. When a person has a foreign inheritance there may not be any estate tax on receiving the money, but if the account generates income then there is income tax. In addition, if the account value exceeds $10,000 (or the annual aggregate total of all the foreign accounts exceeds $10,000) the person must still report the information and therefore the value of the account will go towards the penalty.
Do I Receive Criminal Protection under the Streamlined Program?
No. While a person is almost guaranteed protection against prosecution under OVDP, there is no criminal protection under the streamlined program. Although, if the streamlined submission goes as planned then the person is normally spared an IRS audit for the foreign account information. In other words, if a person successfully submits to the streamlined program, while they may not be audited for their foreign account information and income they can still be audited for domestic issues for the years included in the streamlined program submission.
Golding & Golding: About Our International Tax Law Firm
Golding & Golding specializes exclusively in international tax, and specifically IRS offshore disclosure.
We are the “go-to” firm for other Attorneys, CPAs, Enrolled Agents, Accountants, and Financial Professionals across the globe. Our attorneys have worked with thousands of clients on offshore disclosure matters, including FATCA & FBAR.
Each case is led by a Board-Certified Tax Law Specialist with 20 years of experience, and the entire matter (tax and legal) is handled by our team, in-house.
*Please beware of copycat tax and law firms misleading the public about their credentials and experience.