- 1 IRS Voluntary Disclosure
- 2 Accurate Tax Filing Information
- 3 FATCA & FBAR Basics
- 4 Foreign Account Reporting vs. Tax on Foreign Income
- 5 FBAR vs. FATCA
- 6 Prior Year Non-Compliance
- 7 Want to Learn More About IRS Offshore Disclosure?
- 8 When Do I Need to Use Voluntary Disclosure?
- 9 Common Un-filed IRS International Tax Forms
- 10 Getting into Compliance
- 11 5 IRS Methods for Offshore Compliance
- 12 1. OVDP
- 13 2. Streamlined Domestic Offshore Disclosure
- 14 3. Streamlined Foreign Offshore Disclosure
- 16 4. Reasonable Cause
FATCA and FBAR (2018) – Understanding IRS Offshore Reporting & Tax
Two of the most important international tax forms are FATCA (Foreign Account Tax Compliance Act) Form 8938 and the FBAR (Report of Foreign Bank and Financial Account Form, FinCEN 114.
While the FBAR is a relatively easier form to complete, just trying to determine which accounts and assets to include vs. exclude can be a bit daunting. The biggest concerns with the FBAR are the penalties, that range from a warning letter in lieu of penalty, all the way to a 100% penalty in a multi-year audit.
Alternatively, Form 8938 is more complex than the FBAR, since it involves more the reporting of foreign income as opposed the FBAR, which only requires the reporting of account balances — but the penalties for Form 8938 are less severe (but can still reach $60,000.00).
IRS Voluntary Disclosure
At Golding & Golding, we focus exclusively on IRS Offshore Voluntary Disclosure. While we receive numerous inquiries for requests to prepare current year returns outside of Offshore Voluntary Disclosure, it is not a service that we currently offer (unless it is part of one of the offshore disclosure programs).
Accurate Tax Filing Information
With that said, we like to provide as much information as we can to assist individuals in preparing their own returns. We know many of you other tax attorneys and CPAs like to visit our site (some of you apparently several hundreds of times a year) to obtain information in order to prepare international tax returns and reporting forms for your clients.
That is not the purpose of the site, although you’re more than welcome to keep visiting – but please refrain from contacting us and asking us how to prepare the forms for your clients, when you are advertising that you are “Experts” in the field.
FATCA & FBAR Basics
We typically do not recommend that you prefer your International Tax Return yourself. International tax is hard, even if you are just preparing returns for the current year, and outside of the offshore disclosure program.
Nevertheless, we understand you may want to go at this yourself. Therefore, this post is intended as a basic summary for individuals who for one reason or another prefer to try to prepare their tax returns themselves, and just need a little bit of understanding regarding the main issues.
**This post is for informational purposes only, and should not be relied upon in actually preparing your return.
Foreign Account Reporting vs. Tax on Foreign Income
Reporting and tax are two different issues:
The United States is a Citizen-Based Taxation country (CBT) with a worldwide income model. What that means to you, is that whether you are a U.S. Citizen, Legal Permanent Resident or meet the Substantial Presence Test, you will have to file a tax return to include your worldwide income. It does not matter if you live in the U.S. or overseas, and it does not matter if you earn the income while residing in the U.S. or abroad.
You may qualify for Foreign Earned Income Exclusion, or possibly a Foreign Tax Credit. You may also consider taking a “strong” tax position, for example if it involves an Australian superannuation or UK retirement of a 25% lump sum, which you take as “periodic payments.”
Nevertheless, the income must still be included on the actual return.
Reporting deals largely with foreign accounts, assets, and investments. Depending on the type of foreign accounts, assets or investments, you have, you may be required to report this information on any number of different international informational reporting forms.
There are many different forms, and while the two most common forms are the FBAR and FATCA (Form 8938), there are various other forms as well, including:
- 3520 (Gift or Inheritance from a Foreign Person)
- 5471 (Foreign Corporation)
- 8621 (Foreign Passive Investment aka PFIC)
- 8865 (Foreign Partnership)
Some of these forms are filed at the same time as a tax return, and others are not. Some are filed at the same location as your tax returns, and others are not. Therefore, before completing the form for submission, be sure to review the IRS instructions regarding the particular form.
Most IRS forms have a set of instructions that provides a line by line item breakdown of the different form and what needs to be included. These instructions are ambiguous at best, but they are hepful. Therefore, as long as your position regarding the form is not frivolous and/or reasonable, you are allowed to take a position on attacks matter that is unclear – there is nothing illegal about.
FBAR vs. FATCA
These two forms are not the same, and they are not mutually exclusive. You may to file one form, both forms…or if you’re lucky neither of the forms.
Here’s the down and dirty differences between these two forms:
FBAR (FinCEN 114)
This form is been around for almost 50 years. With the recent introduction and enforcement of FATCA, the IRS has increased enforcement of the penalties associated with the form. Not all individuals who do not file the form will get hit with penalties, and even if they do, the penalty might simply be a warning letter in lieu monetary penalty. The penalty might be much worse than that, but then again…it may not be the bad. FBAR Penalties are like the “Wild West” of IRS Penalties.
The form is filed electronically with FinCEN. The form is not filed with your tax return, even if you are filing electronically for your tax return, because they go to different departments.
At the most basic level, if you have more than $10,000 in annual aggregate total in foreign accounts, life insurance policies, pensions, investment funds, etc. then you file the form, and you list all of the account information. It does not need to be perfect, but you have to act with due diligence.
Remember, it is an annual aggregate total, so it does not matter if you have $10 million in one account, or 19 accounts with $1000 each in them. If, in total you have more than $10,000 during the year on any given day, in annual aggregate total, you typically meet the basic threshold for filing the form.
**The money does not need to be yours. In other words, whether you’re the owner, joint owner, or signatory on the account – you are still required to file form if you meet the threshold requirement.
FATCA (Form 8938)
FATCA is the Foreign Account Tax Compliance Act. It is designed to catch individuals who are evading tax and not reporting therefore money to the IRS. Most people would argue it is a breach of our constitutional right to privacy (we agree) and that it doesn’t achieve the goals it is intended to achieve (we also agree).
But, we are sticklers for the rules, and the rules say if you meet the threshold requirements, you have to file. Unlike the FBAR, the form is filed along with your 1040 tax return. Moreover, there are various different threshold requirements, depending on whether you are married filing joint or single, and whether you reside in the United States or abroad.
Form 8938 has evolved over the past few years, and contains very specific questions regarding foreign income, and related matters. It is important to try to complete the form as best you can, because there are also incredibly high penalties that this form is well – and while the penalties are not as high as the FBAR, they’re still pretty brutal.
Prior Year Non-Compliance
If you are out of compliance for prior years, you should consider getting into compliance before submitting a new tax return for the current year disclosing accounts and assets from overseas that were never reported previously.
If you are considering offshore disclosure, please do not use a quiet disclosure. It is illegal, and if the IRS catches you, you can end up in jail – since it is point-blank tax fraud and tax evasion.
Want to Learn More About IRS Offshore Disclosure?
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.
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.
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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.)