- 1 Delinquent FBAR Submission Procedures
- 2 FBAR Delinquency
- 3 Unfiled FBAR with No Unreported Income
- 4 Unfiled FBAR with Income – Reasonable Cause
- 5 Unfiled FBAR with Income – Non-Willful
- 6 Streamlined Domestic Offshore Disclosure (SDOP)
- 7 Streamlined Foreign Offshore Disclosure (SFOP)
- 8 Non-Compliance with U.S. Tax Law
- 9 What Can You Do?
- 10 4 Types of IRS Voluntary Disclosure Programs
Delinquent FBAR Submission Procedures (2019) – IRS Fundamentals
Delinquent FBAR Submission Procedures: FBAR Delinquency is when a U.S. Person with Foreign Bank and Financial Accounts had not reported to FinCEN or the IRS.
Delinquent FBAR Submission Procedures
FBAR Delinquency usually sounds a lot worse than it really is.
In actuality, in most instances, a person will qualify for one of the less severe disclosure programs such as the Streamlined Program or DIIR (Delinquent International Information Return Submission Procedures) which is also known as (Delinquent FBAR Submission Procedures) — and avoid any major IRS Offshore fines and penalties.
In general, FBAR delinquency can be broken down into various different categories. In the most benign situation – in which a person simply has unreported FBARs but no unreported income – and was non-willful or can show Reasonable Cause, they can usually skate by without any penalty.
Typically, it just involves the mere filing of the unfiled previous and current FBARs, along with a statement.
It is important to note that there is a difference between not having any unreported foreign income (so the tax return may not need to be amended, aside from possibly the schedule B, Question 7) and not having any U.S. taxes due.
Just because a person has no US tax liability due on their foreign income does not qualify them for the delinquency procedures per se, but they can still submit to “Reasonable Cause” (See below).
Unfiled FBAR with No Unreported Income
This is typically the best position to be in (as far as good positions and FBAR Reporting can go). That is because in most situations, the catalyst for the IRS to issue penalties is as a result of unfiled FBAR and unreported income.
In other words, absent willfulness, if a person does not have any unreported income, they are not required to submit to either streamlined program or traditional OVDP — both programs which require the payment of the penalty(s), unless the person qualifies as a Foreign Resident under the Streamlined Foreign Offshore Procedures.
In a situation in which a person has no unreported income, they can typically follow the IRS FBAR Procedures.
Unfiled FBAR with Income – Reasonable Cause
When a person has unfiled FBARs, along with undisclosed foreign income, it becomes more of a problem. That is because from the IRS’ perspective, the individual not only failed to file form(s), but also failed to report income.
If a person does not have all of their income reported, it alerts the IRS that there is potential U.S. tax liability due. This can be distinguished from merely not filing FBARs, which does not presuppose that any monies are due to the IRS.
For individuals who still do not want to pay a penalty in accordance with the IRS Offshore Voluntary Disclosure Programs (OVDP or Streamlined), they may still have the opportunity to submit a reasonable cause statement, along with submitting the FBARs.
What is Reasonable Cause and FBAR Submissions?
Many attorneys and CPA’s misunderstand the “Reasonable Cause” option. A person can submit a reasonable cause statement, if they can show reasonable cause for not filing the FBAR. With that said, reasonable cause is more risky than the streamlined program, and it typically has a higher threshold.
What is the Risk?
Reasonable Cause can be riskier than Streamlined, because for Streamlined the person has to show they are not willful… Which according to the IRS, simply means that they were “not willful.” A person can show the facts and circumstances that they just didn’t know it had to report the income/accounts, assets, etc..
For reasonable cause, a person must make a proactive statement showing that their failure to report was reasonable. This can usually be met by reasonably relying on a tax professional who may have never asked you about your foreign accounts or told you you did not have to report.
Before making any proactive reasonable cause statement, a person should speak with an experienced offshore voluntary disclosure lawyer first to understand the pros and cons. That is because unlike the streamlined program in which there is a set penalty structure, the IRS has more leniency/leeway to issue penalties under reasonable cause — which could actually exceed the penalty you would pay under the streamlined program.
Unfiled FBAR with Income – Non-Willful
The two programs for people who are non-willful is the Streamlined Domestic Offshore Procedures (SDOP) and Streamlined Foreign Offshore Procedures (SFOP).
Streamlined Domestic Offshore Disclosure (SDOP)
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.
Streamlined Foreign Offshore Disclosure (SFOP)
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.
Non-Compliance with U.S. Tax Law
Whether it is because you did not you had to report foreign accounts, thought you were below the threshold for filing, did not realize non-bank accounts were required to be reported, and/or have other unreported income, accounts, investments or assets – we can help.
What Can You Do?
Presuming the money was from legal sources, your best options are either the Traditional IRS Voluntary Disclosure Program, or one of the Streamlined Offshore Disclosure Programs.
4 Types of IRS Voluntary Disclosure Programs
There are typically four types of IRS Voluntary Disclosure programs, and they include:
- Traditional (IRM) IRS Voluntary Disclosure Program
- Streamlined Domestic Offshore Procedures (SDOP)
- Streamlined Foreign Offshore Procedures (SFOP)
- Reasonable Cause (RC)
Contact Us Today; Let us Help You.
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)
- Post-OVDP Opt Out – IRS Increased Penalty Risk (5 Considerations) - June 17, 2019
- Is Your Tax Preparer Recommending Illegal IRS Offshore Reporting? - June 11, 2019
- Estates FBAR Filing – Overseas Assets | IRS Estate FBAR Filing - June 2, 2019