FATCA and FBAR Example of Non-Compliance – Fines & Penalties
With FATCA (Foreign Account Tax Compliance Act)firmly in place, and more than 100 countries and thousands of foreign financial institutions reporting US taxpayers to the IRS and U.S. Government, receiving a FATCA Letter and not getting into compliance by filing your FBARs, 8938s, 3520, 3520-A, 5471 or 8621 – as well as an amended tax return(s) – may result in irreparable Financial harm and damage to you and your family.
The following is a case study example of how one individual can get stuck in the FBAR/FATCA matrix:
Background – David
David is a U.S. Legal Permanent Resident (Green Card Holder or LPR Status) and Chinese Citizen who currently resides in the United States. He has had his Green Card for nearly 20 years and alternates between living in the United States and living abroad.
He has numerous accounts worldwide with upwards of $1-$3 million at any given time. The money is scattered amongst different accounts, including Investment Accounts, Banking Accounts, Mutual Funds, and Insurance Policies.
David Received a FATCA Letter
Although David’s primary residence is in the United States, when he opened up his foreign bank accounts he used an address in Hong Kong as his main address. In addition, since he is a Chinese citizen, David does not disclose that he is a US Resident for Tax Purposes when he opened the accounts. (In other words, he does not complete a W-9).
Recently, David’s wife, Irene (who resides primarily in Hong Kong) informs David that they received a FATCA Letter at their home from the foreign financial institution (Hang Seng Bank). The letter requests that David and his wife (as a Green Card Holder) confirm their US residence status.
David begins researching the issue online, and after visiting various ex-pat forums (and against the advice of the attorneys he spoke to) decides he is going to do nothing, except “sit and wait.”
David and Irene’s Information is Sent to the IRS
Multiple foreign banks have already provided the IRS with David and Irene’s information regarding their foreign accounts. Unfortunately for David and Irene, they had already been selected for audit on an unrelated matter at around the same time that the IRS received the notice from Hong Kong. Specifically, David and Irene were being audited because a 1099 was issued to David from a US bank in the amount of $93.
The $93 stemmed from a small savings account that David forgot he had, since he had not accessed it for many months. As a result, David and Irene did not report the information to the IRS in their original tax return.
David and Irene are Audited
David and Irene are audited by the IRS. They receive a notice from the IRS in the form of a Request for Documents (IDR) requesting various different documents. In addition, they are asked the name of their CPA or other tax preparer.
David and Irene believe they can talk their way out of the issue, and further believe that because they reside overseas they will be fine. After doing more research, David realizes that Hong Kong entered into a IGA (Intergovernmental Agreement) with the United States and that his money overseas is subject to possible levy or seizure.
It Gets Worse…
While in Hong Kong, David and Irene use a licensed CPA who prepared their taxes. The CPA was aware that David and Irene had foreign accounts but did not put that information on the tax return. David and Irene were also aware of this but decided to roll the dice and take their chances. They intentionally checked off “No” for Question 7 on Schedule B.
Since the failure to report was willful, and the CPA herself had gotten into trouble for not reporting foreign accounts for many clients residing in Hong Kong, David and Irene would not have been able to rely on the Streamlined Program or make a claim for “Reasonable Cause” anyway. Instead, David and Irene are considered willful tax evaders – which would subject them to a 50% penalty on the balance of their accounts.
It Gets even Worse…
David and Irene are being audited for three years initially, so the total value of the penalty they could get hit with is 100% value of the foreign accounts — which is just the FBAR penalties. Since David and Irene have more than $5000 of unreported foreign earnings, the amount of time the IRS has to audit them expands to six years.
That means for six years, the IRS will be able to audit prior tax returns, issue penalties or prior tax returns, charge taxes and interest for prior tax returns, and literally make David and Irene’s life a financial mess. If the IRS discovers the Fraud, there is no Statute of Limitations — and the IRS can go back and audit them as far as they would like.
Passport Revocation, Customs Holds & Loss of Green Card
If David and Irene decide that they are not going to pay the fine and just “hide out” in a foreign country, their ability to travel may be severely impaired. That is because (working in conjunction with foreign countries) the United States could try to place a hold on David and Irene’s passports and/or ability to travel. It could result in David and Irene losing their passport (if it is US-based) and/or be subject to a customs hold at the airport, and forced to answer questions from the US government.
Moreover, the U.S. could also deny the renewal of the Green Card or deny Naturalization, due to Tax Fraud and Evasion.
The IRS Special Agents Also want to Investigate
Since David and Irene had over $3 million of unreported foreign accounts at the time of Audit, nearly $100,000 in annual unreported foreign income, and used a CPA that also was in trouble – David and Irene will also receive a visit from the IRS Special Agents since their failure to report could be considered willful… which can be considered a tax crime
With the global crackdown on International Tax Evasion, it is best to try to get into compliance before you are detected by the IRS, DOT or DOJ – we can help!
*Since FBARs carry the highest penalties (Aside from Tax Fraud) we reproduced our very popular “FBAR FAQs from the Trenches” for your review.
Golding & Golding are highly-respected International Tax Lawyers and FBAR (Report of Foreign Bank and Financial Account) Lawyers who have represented numerous individuals and businesses with FBAR compliance in accordance with IRS and DOT regulations.
Many unscrupulous law firms, CPAs and Lawyer/CPAs are providing the public with misinformation about the FBAR form in order to try and scare them into retaining them for FBAR representation.
Unfortunately, many people and businesses are getting into trouble because they relied upon a tax professional who really has no clue about international tax law or FBAR related experience beyond using Adwords and other marketing ploys to peddle their wares – only to get the client in a serious bind with the federal government.
We are providing you with a Free Summary of the common Frequently Asked Questions regarding questions we have received over the years. While the form itself has a set of instructions and frequently asked questions section, our Frequently Asked Question list is more of “FAQs from the trenches,” in which we will answer questions which are not really provided for by the government.
What is an FBAR Statement?
An FBAR statement is a Report of Foreign Bank and Financial Accounts form. It is electronically filed annually with the Department of the Treasury online. Before this year (2016) the form had to be filed no later than June 30th of the current tax year in order to report the accounts for the prior tax year (File in 2015 to report the 2014 Maximum Account Balances). The law is changing in 2016 which will be applicable in 2017, and will have a April 15, 2017 due date.
Is it more than $10,000 per account, or in Total?
An FBAR is required to be filed when a person or business (explained below) has an annual aggregate total of foreign accounts that exceeds $10,000. It does not matter if all that money is in one account or if a person had 11 accounts with $1000.00 in each account (you get the picture, right?). Once your overseas foreign accounts exceed $10,000, it is now time to report all of the foreign accounts.
Who or What is a U.S. Taxpayer?
This question can get more and more complex depending on who you speak to and what the context of the question is. To that end, if you are either a US citizen, Legal Permanent Resident, or Foreign National Subject to US tax such as a visa holder (if you meet the Substantial Presence Test), then you should most likely file the annual FBAR form.
*If you are unsure whether you should file the form or not, you should speak with an experienced by lawyer to evaluate your particular situation.
I did Not have to File a Tax Return?
This can also get confusing, but it is important to remember that the FBAR is not filed with your tax return. Rather, while your tax return is filed directly with the Internal Revenue Service (by mail or online), your FBAR is filed online electronically directly with the Department of Treasury. Even if you do not meet the threshold requirements for filing a tax return, it does not mean you do not have to file an FBAR. If your annual foreign account balances exceed $10,000, you should file the FBAR.
The Money in the Foreign Accounts is not Mine?
This is not unusual. It is very common in foreign countries to have children or other individuals with a Power of Attorney over another person’s account – even when the money does not belong to the POA holder. To that end, if a person’s name is on the account then they should still file an FBAR statement. There is a section of the FBAR reserved for individuals who have signatory authority or other type of authority on the account, but the money is not theirs.
I do not want to Report my Foreign Parents’ Name on the FBAR
We understand the importance of privacy. Generally, there are ways around reporting the information the FBAR where you disclose certain information but not all the requested information (while still being FBAR compliant).
The Money is from an Inheritance
It is important to remember that the FBAR is a reporting form. In other words, the Department of Treasury wants to know whether you have the money overseas in case there is no other way for the DOT to track it. In addition, under FATCA, many countries and foreign financial institutions have agreed to report accounts to the U.S.
Thus, even if the money was inherited, you are required to report the account information on the FBAR. If you fail to do so and get stuck in the IRS/DOT crosshairs as a result of the foreign financial institution reporting the account in accordance with FATCA, it will be much harder to explain the situation at that time versus simply filing the FBAR timely or entering into OVDP or the Streamlined Program.
**That does not mean you should file a late FBAR (please see below)
My Accounts are in the name of a Foreign Corporation
This is where the FBAR starts to get more complicated. The most important thing to remember is the concept of the FBAR is to promote financial transparency. Therefore, if no matter how you structure the business in the end the money is yours, then you should file the FBAR.
This can be distinguished from a company in which you are merely an employee and have signatory authority, which would require a comprehensive analysis of the business and your rights to the business and money before determining whether you should file.
My Accounts are in the name of a Foreign Holding Corporation
It does not matter that the accounts are in a Foreign Holding Corporation – this is not sufficient to avoid filing the FBAR statement. Otherwise, a US taxpayer could simply open a BVI Holding Corp and put the holding Corp. as the owner of the account and thus not to have the file the FBAR – even though all of the account money belongs to the US taxpayer – which is directly contradictory to the purpose of the FBAR.
If you are the “true owner” of the money, then filing the FBAR is required.
My Accounts are in the name of a Foreign PFIC Corporation
The same thing goes for a Passive Foreign Investment Company. Depending on which country you are in and how the country titles the foreign company, these companies come in all shapes and sizes. Back in the 80s, they were used primarily to avoid detection by the United States government of foreign account and asset information. There is no exception to filing an FBAR simply because you transferred your money into the PFIC.
My Accounts are in the name of a Foreign Trust
As you can imagine, foreign trusts are not immune from having to file an FBAR statement either – in addition to possibly a 3520 and 3520A. Whether the purpose of the foreign trust was “harmless,” and/or you thought you could avoid US detection or possibly to form the foreign credit shelter trust or foreign asset protection, a foreign trust does will not negate your requirement to file an FBAR; if the accounts are in a foreign trust, in which you are the owner of the foreign trust then you have to report the account on the FBAR.
What Types of Accounts must be Reported on an FBAR?
Essentially, any account that is maintained at a foreign financial institution must be reported on the FBAR – but this does not mean every income generating asset has to be included. Here’s an example: if you have a Foreign Bank Account at a Foreign Financial Institution it has to be reported on the FBAR. Conversely, if you have a foreign rental property that is earning foreign rental income, while the foreign rental income must be reported on your tax return, the value of the home need not be reported on the FBAR.
Do I have to report my Life Insurance Policy?
This is another complex area of the FBAR. Essentially, if the life insurance policy (or life assurance policy as it is called in many countries) has a surrender value for sale value insofar as you could sell the policy on the open market – it should most likely be reported on the FBAR.
In situations like this where there is a reporting requirement, it is better to err on the side of caution.
Reporting on the FBAR vs. Paying Tax on the Money
This is a question we receive often and so we distinction must be made. Just because you are reporting a foreign account on an FBAR does not mean there is a taxable event taking place. For example, the money may have been inherited, received as a gift and/or earned with income tax already having been paid on the earnings.
Thus, the key issue to remember with an FBAR is that the FBAR is a reporting requirement for you to update the Department of Treasury with your foreign accounts that you maintain overseas; it has nothing to do with whether there is a taxable event taking place.
I do not know my Maximum Account Value?
When you are reporting on the FBAR, you are supposed to provide the maximum value of the account balance for the year. Depending on which country you are in, and whether the account provides you statements (or if it is a passbook account) that information may not be available. When that information is not available you may either click the box that reads maximum account balance unknown or you may also consider using the balance that you have available, and explaining why you cannot obtain the maximum value in the box provided on the first page of the FBAR.
Can If I file a Late FBAR Statement?
This is a very complex issue. Technically, you are not allowed to file a late FBAR statement. Some people have done so in accordance with submitting a Quiet Disclosure, which can result in extremely high fines and penalties.
The Internal Revenue Service a Department of treasury are taking foreign account compliance very seriously and it is a major priority for the IRS. If you have not filed your FBAR statements, you have three main alternatives: Reasonable Cause Statement, Streamlined Disclosure, or OVDP (these are briefly discussed below)
Late FBAR Filings and a Reasonable Cause Statement
If you have not filed your FBAR timely, the first option is to submit the FBAR late accompanied by a Reasonable Cause Statement. The failure to file an FBAR can have extremely high penalties. Therefore, if you opt for the reasonable cause statement as opposed to one of the approved programs discussed below, then you are essentially submitting the account information and asking for forgiveness from the IRS for any penalty.
Two things to keep in mind his first, the IRS is not very sympathetic, and second, if the IRS disagrees with your reasoning you have now disclosed all of your account information to the IRS with no protection from penalties or criminal investigation.
Late FBAR Filings and the Streamlined Program
Under the streamlined program, a person will amend their tax returns for three years as well as file six years of unreported past FBAR statements (assuming that they are a US taxpayer for six years; if they have only been a US taxpayer for four years they would only file four years of past FBAR statement). This program is reserved for taxpayers who were non-willful (in other words, they were unaware of the requirement to file FBAR and report their foreign income).
For more information about the Streamlined Program please Click Here for a summary provided by Golding & Golding.
Late FBAR Filings and OVDP
OVDP is the Offshore Voluntary Disclosure Program. It is a program designed for individuals, businesses and trusts that knowingly intentionally failed to report their foreign account information and foreign income earnings. The program requires the applicant to fil eight years of past FBAR statements along with eight years of original and/or amended tax returns.
For more information about OVDP please click here for a summary provided by Golding & Golding.
Is the FBAR the same as an 8938 form?
No. While the forms are similar, they do have key differences. The 8938 (Statement of Specified Foreign Financial Assets) is filed with your tax return and has different threshold requirements (much higher than the $10,000+ for an FBAR), which will be dependent on whether the taxpayers are filing married filing jointly, married filing separate, single — as well as whether they reside in the United States or overseas.
We hope this summary will assist you understand the general concepts and requirements of filing an annual FBAR statement. This list is by no means comprehensive and if you have a specific question which was either not answered here (or is unclear) please feel free to contact our firm.
Below we have provided a summary of the FBAR filing process:
If you, your family, your business, your foreign trust, and/or PFIC (Passive Foreign Investment Company) have more than $10,000 (in annual aggregate total at any time) overseas in foreign accounts and either have ownership or signatory authority over the account, it is important that you have an understanding of what you must do to maintain FBAR (Report of Foreign Bank and Financial Accounts) compliance. There are very strict FBAR filing guidelines and requirements in accordance with general IRS tax law, Department of Treasury (DOT) filing initiatives, and FATCA (Foreign Account Tax Compliance Act).
Filing FBARs and ensuring compliance with IRS International Tax Laws, Rules, and Regulations is extremely important for anyone, or any business that maintains:
- 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); or
- Foreign Accounts held in a PFIC (Passive Foreign Investment Company)
Golding & Golding provides Foreign Account Reporting strategies for clients around the globe in order to report Foreign Bank Accounts and become FBAR compliant. We also defense clients who are under FBAR Audit by the IRS and DOT.
What is an FBAR?
In accordance with international tax law compliance, taxpayers who meet the threshold requirements are required to file an FBAR.
An FBAR is a “Report of Foreign Bank and Financial Accounts” form. It is a form that is filed online directly with the Department of Treasury. Unlike the tax return, the FBAR form must be filed by June 30th of the tax year and there are no extensions available for filing it late. If you attempt to file it late, there can be serious repercussions, including fines and penalties – since it is considered Quiet Disclosure or Silent Disclosure in an attempt to circumvent the OVDP or Streamlined Program rules and regulations.
**UPDATE: Starting in 2017 for Tax Year 2016 – filing of your 2016 FBAR will be in accordance with the same time periods to file your tax returns, which is by April, 2017 unless you receive an extension of time to file.
FBAR filings can be overwhelming, especially if you have never filed one before. If this is the case, our experienced international FBAR Lawyers can assist you in ensuring you are compliant with IRS FBAR Law and FATCA requirements.
Who is Required to File an FBAR?
Not everyone who has foreign accounts is required to file an FBAR. Rather, it is required to be filed by all U.S. Taxpayers (whether they reside in the U.S. or overseas) with foreign accounts that have an “annual aggregate total” exceeding $10,000 at any time during the year. Thus, if a U.S. Taxpayer (including Legal Permanent Residents “aka Green Card Holders”) maintains foreign accounts, including banks accounts, financial accounts, or insurance policies that have a combined value of more than $10,000 (or has indirect ownership of the account or signature authority), then that person is required to file an FBAR statement.
What if None of My Accounts Exceed $10,000?
It does not matter. It is important to remember that the threshold is the Annual Aggregate Total value at any given time during the year. This means if you have 21 accounts with $500 in them at any given time during the year, you are STILL required to file the FBAR and list all the accounts on it, even if none of the accounts exceed $10,000. In other words, you are required to report the total value of all your foreign accounts located in any foreign country once you exceed the $10,000 annual aggregate total threshold on any given day during the year.
There are various accounts and other assets (insurance policies) which may or may not be included in your FBAR analysis. Please contact one of our experienced FBAR Lawyers for further assistance regarding specific account disclosures.
What if I did Not File an FBAR Statement?
If a person fails to file the FBAR, there is still hope. Depending on whether the person also had unreported foreign income (income that was earned overseas and not reported on the U.S. tax return – even if it was reported in a foreign country and foreign tax was paid), the IRS and DOT will determine if a penalty will be issued; usually the taxpayer will be penalized but the amount of the penalty will vary.
What are the Penalties for Failing to File an FBAR?
Recently, the Internal Revenue Service issued a memorandum which details how the IRS “believes” the agents should penalize individuals in accordance with their authority. Essentially, there are two sets of penalty structures and they are based on whether the taxpayer was willful or non-willful.
Willful is determined by a “totality of the circumstances” analysis. Somebody is considered to have acted willfully if they intentionally evaded the payment of taxes or disclosure of foreign accounts. In other words, they willfully or knowingly “knew” about the requirement to disclose and report overseas assets, accounts, and income but chose not to. In these situations, the Internal Revenue Service has the authority to penalize the taxpayer upwards of 50% of the value of the assets per audit year for failing to file the FBAR (in addition to a slew of several other non-FBAR penalties), but no more than 100% value of the account over an audit period.
Generally, audits last three years and the Internal Revenue Service has made it known that they will not penalize the individual beyond the value of the accounts for the audit periods at issue. Thus, if you had $1 million in your foreign bank account and you knowingly did not report this information to the IRS and they audit you for three years, they can take all of your $1 million.
When a person is non-willful, it generally means they were unaware of the requirement to file an FBAR. In this situation, the IRS takes some mercy – but nowhere near as much mercy as you can imagine certain people deserve (example: individuals who relocated from overseas and have foreign accounts that they simply did not use or earn much income on, or individuals who inherit money from overseas relatives.)
In these situations, the IRS has four (4) main options in terms of penalizing the taxpayer:
- The IRS agent can simply issue a warning letter instead of a monetary penalty to the taxpayer. This will rarely happen (although Golding and Golding has achieved this result on multiple occasions for individuals who have been audited and did not file FBAR statements and/or otherwise do not qualify for one of the IRS offshore voluntary disclosure programs, but were non-willful).
- The IRS agent could penalize the taxpayer a total of $10,000 for all of the years that the taxpayer did not file FBAR statements. For example, if the taxpayer is audited for three years and did not file FBARs for those three years, the IRS may penalize the taxpayer $10,000 for the total amount of the audit.
- The IRS agent could penalize the taxpayer $10,000 for each year that the FBAR was not filed. So using the example above, if the taxpayer is audited three years and did not file an FBAR for three years, then the IRS could penalize the taxpayer $30,000 – and usually not beyond the value of the account.
- The IRS agent could penalize the taxpayer $10,000 per account per year. In other words, if the taxpayer had four different bank accounts and was audited for three years – the IRS could penalize taxpayer $120,000.
One very important thing to remember is that the penalty scheme listed above is for non-willful taxpayers. In other words, even though the IRS knows the taxpayer did not intentionally attempt to evade tax, the IRS has the power to still issue tens, if not hundreds, of thousands of dollars in penalties in a non-willful situation.
Whether a person is willful or non-willful is a complex evaluation which requires a comprehensive factual analysis by an experienced FBAR lawyer to ensure the taxpayer is informed before making any representation to the IRS.
Why is it Important to File an FBAR?
Prior to the recent changes in the law, taxpayers were able to fly below the radar and could probably last most of their lifetime without having to file international tax forms disclosing their foreign income and overseas assets. The problem is that under the new FATCA (Foreign Account Tax Compliance Act) laws, foreign countries and the United States are entering into intergovernmental agreements (IGA) with foreign countries.
IGAs are “reciprocity agreements.” In other words, while foreign countries are going to report account information of US taxpayers (U.S. Citizens, Legal Permanent Residents, and Foreign Nationals Subject to U.S. Tax), the United States is going to do the same and report account information to the foreign countries. Thus, there is a benefit to both parties in entering these IGA Agreements.
FBAR compliance is very important for any taxpayer subject to IRS tax reporting requirements. The failure to file a timely FBAR and remain in IRS tax compliance can lead to significant fines, penalties, and other possible consequences.
What can I do to get FBAR Compliant?
There are various safe harbor programs in place, which if a person meets the requirements, then they can have their penalty reduced if not eliminated. The two main programs are the Offshore Voluntary Disclosure Program (OVDP) and Modified Streamlined Program. These safe-harbor programs can be eliminated by the IRS at anytime.
We have gone into great detail on our website explaining the difference between the Offshore Voluntary Disclosure Program (OVDP) and Modified Streamlined Program. Essentially, Offshore Voluntary Disclosure Program (OVDP) is a program intended for those who were willful. In other words, if you knowingly defrauded the IRS by not reporting your foreign assets and you “knew” you were supposed to report the information, then the OVDP is the proper program for you.
In this program, the penalty is relatively high compared to the other program, but you walk away with the satisfaction of knowing you only have to pay a financial penalty and you will probably not end up in prison doing a 20-year prison stint with real criminals.
Alternatively, if your only mistake was that you were unaware of the requirement to file FBAR statements, then you can enter the Modified Streamlined Program. Unlike OVDP, the Modified Streamlined Program does not provide you criminal protection but if you are non-willful then you do not require criminal protection. Under the streamlined program, the penalty structure is reduced significantly and the filing requirements are much more limited.
Nevertheless, it is absolutely crucial that you do not enter the streamlined program if you were willful – because if you are detected by the IRS and they find that you were clearly willful but you were just simply trying to get a penalty reduction, then the IRS will see this as tax fraud and tax evasion and they will prosecute to the fullest extent of the law.
**In addition, the current reduced penalty rate will often increase with each new year, and most importantly, if you find yourself under audit, then you are disqualified from entering these programs.