FATCA – Filing False Tax Returns for Previous Years
Under FATCA (Foreign Account Tax Compliance Act), Foreign Financial Institutions (FFIs) are required to disclose information about taxpayers who have foreign accounts.
What if you have foreign accounts which you did not disclose on either an FBAR or Tax Return and the IRS gets wind of it?
Aside from the significant monetary penalties that can reach 100% value of the account balances, you may also be subject to criminal investigation if the IRS believes your actions were willful. If you are seeking to get compliant, you may consider entering either the OVDP (Offshore Voluntary Disclosure Program) or IRS Streamlined Program.
Golding & Golding provides you with a summary of FATCA, followed by a summary of OVDP vs. Streamlined Program:
FATCA is the Foreign Account Tax Compliance Act. It is an IRS International Tax Law that is designed to reduce offshore tax evasion and tax fraud. FATCA requires U.S. Taxpayers to disclose unreported foreign bank accounts, foreign financial accounts, and foreign income to the IRS; otherwise the Taxpayer can be subject to extremely high fines, penalties, and outstanding tax liabilities.
Unfortunately, most people only learn of FATCA when they receive a letter (“FATCA Letter”) from their foreign bank or foreign financial institution requiring the U.S. Taxpayer to show proof that they are in FATCA compliance.
Accounts subject to FATCA compliance 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
• Foreign Accounts held in a CFC (Controlled Foreign Corporation); or
• Foreign Accounts held in a PFIC (Passive Foreign Investment Company)
If the Taxpayer cannot show proof that they have complied with FATCA, the bank or foreign financial institution will freeze or even forfeit the foreign accounts.
I Have Overseas Accounts and Income, Now What?
To make matters worse, you or your friend probably conducted some quick online research and gathered enough misinformation to:
- Assume that the IRS and Department of Treasury will be kicking in your door at any minute to interrogate you;
- Resign yourself to the fact that your only options are either doing a hard 20 in federal prison, or escaping into the middle of the night under a cloak of darkness and assuming a new identity; or
- Contact CPAs, enrolled agents, or inexperienced international tax attorneys (or any inexperienced attorney) who use fear and scare tactics in an attempt to sell you.
Under FATCA, Does the IRS Want to Arrest and Prosecute People?
As one of the few small international tax law firms in the country that has represented numerous taxpayers in both the offshore voluntary disclosure program (OVDP) and newly implemented modified streamlined program in the United States and overseas, we can tell you that there is almost nothing to be afraid of. The purpose of these international tax law programs is to “generate revenue” for the United States.
The IRS accomplishes this by mandating individuals who have not otherwise complied with US tax law involving overseas and foreign accounts to either enter one of the voluntary disclosure programs or risk facing significant monetary penalties and possible prison time for noncompliance (which can be resolved by entering one of these programs).
The Basics of FATCA, OVDP, and the “Streamlined” Program?
In an effort to try to ease your concerns, Golding & Golding put together a very basic FAQ list to try to clear up the misinformation you will find online:
What Does “Willful” Mean?
There is no specific definition for the term “willful”; rather, it is simply a fact-based test (aka “Totality of the Circumstances”). At its core, the IRS wants to know whether you knew you were responsible for filing these taxes and disclosing this information about your foreign accounts.
- Based on a whole set of background facts, including: whether you are a US citizen (even if you reside overseas), US resident, how long you have been residing in the US, do you still reside in the US, did you file your taxes yourself, if you used a tax professional – did he or she ask you about your foreign accounts, and other type of background questions will determine whether you were willful or not.
If I Happened to be Willful, Can I Still Enter One of These Programs?
Yes, and this is where the misinformation online begins. Whether or not you were willful is not the threshold question to determine whether you can enter into one of these disclosure programs. Rather, willful will determine which program you are entitled to enter. If you are not willful, you may enter the streamlined program and have your penalties reduced to 5% or possibly completely eliminated depending on your country of residence and how long you resided overseas – if it all.
- If you were willful, then you should enter the traditional OVDP and pay the 27.5% penalty or 50% (if any of your money was being maintained at one of the IRS’s “Bad Banks”). That is because as long as you are truthful (read: full compliance) in your disclosure, you will usually not be subject to criminal liability. The modified streamlined program generally takes the place of the previous mechanism which was entering into the traditional OVDP and then “opting out” of the penalty, in order to risk audit.
- The problem with “opting out” was that for individuals who were not willful, it is a very heavy burden to bear in terms of the paperwork that was required as well as penalties on taxes, which seemed highly unfair (20% tax on overdue income). Thus, for the non-willful individuals who would have ordinarily opted out of the traditional OVDP, the IRS modified the prior streamlined program — which was previously much more limited in scope.
What is The Difference Between OVDP and The IRS Streamlined Program?
In a nutshell, the traditional OVDP is for individuals who knowingly or otherwise were aware of the requirement of filing and disclosing offshore and foreign assets and tax information but chose not to. On the other hand, if an individual was unaware of the requirement to disclose or otherwise file tax information for their overseas and foreign offshore accounts, then there was no intent and thus, generally no finding of ‘willfulness’.
What Does It Mean To Not Comply With FATCA?
FATCA Is the Foreign Account Tax Compliance Act, which is an act designed to promote and facilitate international tax compliance in accordance with US tax law. As to individuals and businesses, there are specific withholding requirements when submitting payment to US tax persons and/or foreign individuals when the tax income and tax source is foreign.
- In addition, there are certain reporting requirements involving forms such as the 8938 and FBAR (FinCEN 114). The breadth of FATCA is well beyond the scope of this basic FAQ article, but for the average ordinary citizen, it just means complying with IRS international tax law.
When Will These Programs Disappear?
Your guess is as good as mine. There is no way of knowing if or when the IRS will discontinue these offshore voluntary disclosure programs. But, it is important to keep in mind that the IRS can discontinue these programs at any time and they can increase the penalty at any time.
- Moreover, word on the “tax street” is that because so many individuals who were willful are attempting to evade the larger penalty by entering into the streamlined program, the IRS is going to either increase scrutiny, withdraw the program, or increase the penalty for the modified streamlined program.
Why Hire an Experienced International Tax Law Attorney?
While either a tax attorney, CPA, or enrolled agent is licensed to enter individuals into these programs, a person must select an Attorney in order to get the most protection, including the attorney-client privilege (which is only afforded to clients who are represented by their attorneys). What is important to keep in mind is that only an attorney can provide you protection if the IRS Special Agents want to investigate you for potential criminal prosecution.
- Moreover, while many enrolled agents and CPAs are experienced in preparing tax returns and otherwise have some tax knowledge, they do not have the experience in handling sophisticated negotiations with the IRS involving complex areas of law such as FATCA, OVDP, and related matters.
- Finally, while there is a limited privilege in using an enrolled agent or CPA, there is no attorney client privilege between a CPA and/or enrolled agent and the client. Your CPA or EA (unless they are also an attorney) could be called to testify against you.
OVDP vs. IRS Streamlined Program
If you or your business has unreported or undisclosed foreign accounts, offshore assets, or foreign income then you may be considering whether you should enter the Offshore Voluntary Disclosure Program (OVDP) or the IRS Streamlined Offshore Disclosure Program, and what the definition of “Willful” is.
Whether or not you enter Offshore Voluntary Disclosure Program (OVDP) or the IRS Streamlined Offshore Disclosure Program will depend on the facts and circumstances of each taxpayer’s situation. Not two tax situations are identical, and the failure to properly submit to the correct program can have serious consequences for the unsuspecting taxpayer.
Why Comply with IRS Foreign Disclosure Laws?
Because if you fail to comply with FATCA (Foreign Account Tax Compliance Act) as well as general IRS Foreign Disclosure Laws, the IRS has the authority to penalize you upwards of 100% of the value of your offshore assets and accounts as well as:
- Collect Taxes for prior tax years
- Collect Interest on outstanding tax liability for prior years
- Penalize you for the failure to report foreign accounts on the tax return (Schedule B and 8938)
- Penalize you for the failure to report foreign gifts (3520)
- Penalize you for the failure to report foreign Trusts (3520 and 3520A)
- Penalize you for the failure to report ownership in Foreign Corporations (5471 and 5472)
- Penalize you for the failure to report ownership in a PFIC (8621)
- Genera Negligence and Fraud Penalties
- Investigate you for Criminal Tax Fraud & Criminal Tax Evasion if you willfully failed to report your assets & foreign income.
The reason why international tax law compliance has taken center stage is because under the new FATCA (Foreign Account Tax Compliance Act) laws, foreign countries are actively reporting the bank and financial accounts of US citizens and US legal permanent residents. If a foreign country is interested in working with the United States, the foreign country will enter into an “ Intergovernmental Agreement” (IGA) with the United States. These agreements are reciprocity agreements, which means that not only will the foreign country report the information to the IRS, but the IRS will also reciprocate by providing the same information to foreign country tax authorities.
Why Enter either OVDP or the Modified Streamlined Program?
Individuals and businesses who are trying to avoid 100% FBAR penalties and/or Criminal Prosecution may seek to voluntary disclose, pay a penalty (unless abated), and avoid criminal prosecution.
There are the only two approved programs by the Internal Revenue Service that can bring a taxpayer into compliance. Instead of entering the programs, a taxpayer may qualify to directly report under the reasonable cause exception, in which the taxpayer directly submits the forms with a statement explaining why they were not properly filed instead of paying a penalty.
*The IRS is not known to be sympathetic, and if the IRS does not believe you and audits you and/or you are under examination, you are disqualified from entering either the OVDP or Streamlined Program AND the IRS is now informed regarding all of your undisclosed accounts.
**If the taxpayer submits the forms to the IRS without submitting to the IRS Disclosure Programs, it can be considered “silent disclosure” or “quiet disclosure.” If the IRS learns of the Quiet or Silent Disclosure, he IRS will penalize you heavily as well as consider initiating criminal proceedings against you. In this scenario, not only will the IRS seek to take all of your money and assets through the implementation of penalties and levies, but you may be spending the next 2 to 20 years in prison for tax evasion or tax fraud.
What is the Difference between OVDP and the Streamlined Program?
Before making a decision regarding voluntary disclosure, it is important to understand the difference between the two main programs.
OVDP (Offshore Voluntary Disclosure Program Requirements)
In accordance with OVDP filing requirements, The Applicant will then be required to pay the outstanding tax, along with estimated interest, a 20% penalty on the outstanding tax, as well as an “FBAR” 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 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!
When it comes to the Streamlined Program, the penalty is limited to 5% on the highest “year-end” balance for the last 6-years. The reason is that if the person was non-willful, they should not be overly-penalized if there was an artificial increase in the value of the bank accounts – such as from the sale of a home during the tax year.
(A complete breakdown of OVDP requirements can be found on our OVDP Page, by Clicking Here)
OVDP is Unfair for Non-Willful Taxpayers
Before the implementation of the modified streamlined program, it was difficult for individuals who were non-willful (no specific definition, but generally without intent to deceive or defraud) to become compliant. Why? Because if you are non-willful, you still had to go through the filing procedures as if you were willful, and then opt out of the penalty structure and open yourself up for audit.
Not such a big deal, except for the fact that you also had to pay 20% penalty on the outstanding taxes that you owed along with a 27.5% penalty on the highest year’s annual aggregate (unless you successfully “opted out” from the penalty structure – which came with a whole other set of headaches). As you can imagine, for individuals who simply inherited some money overseas, had no international dealings, and had no idea that they were required to report foreign passive income (Interest income) in a country that does not tax its own citizens on passive income earnings — providing this information to the IRS was a huge burden.
What is the Modified Streamlined Program?
In order to avoid “non-willful” applicants from having to go through the entire OVDP process before opting out, the IRS and Department of the Treasury modified a small program in existence, called the streamlined program, which was very limited. The IRS expanded the program to basically allow anyone who was non-willful to enter the program.
The program reduced the amount of documentation that applicants were required to file to only three years of amended tax returns and six years of FBAR (Foreign Account Reporting Statements). In addition, there was no penalty on the tax amount that was due and no penalty on the value of income generating foreign real estate that was not previously disclosed. Moreover, the 27.5% penalty was reduced down to 5%, or completely waived if the foreign residence requirements were met.
Penalty Waiver: there is a small facet of the modified streamlined program called the Modified Foreign Offshore Program. If a person qualifies for the modified stream of program (which means they acted non willfully) and they can prove they lived overseas for a total of 330 days out of the tax year in any year within the last three years, then they may qualify to have the penalty waived.
The Streamlined Programs sounds great, right? Well it is, unless you are attempting to wrongfully evade the 27.5% penalty by entering the program when you knew you were willful.
What if you are caught trying to sneak into the Streamlined Program?
I cannot stress to you enough to not try and enter the Streamlined Program if you were willful. If you knowingly enter the streamlined program and it is found that you acted willfully in your failure to disclose and report your overseas and foreign assets and income you will most likely be prosecuted by the IRS.
The IRS made this fact known in a recent public relations statement. From the IRS’ perspective, if you wrongfully enter this program in order to avoid paying the full penalty amount what you have done is stolen 27.5% or 50% of the penalty amount due to the IRS – and this does not make the IRS very happy.
Even worse is that you may be subject to criminal prosecution. And, since you have already disclosed all the foreign financial information in your Streamlined Program application, you will be in a tough position to try and defend yourself.
Why is the Modified Streamlined program in Jeopardy?
Just like in everything in life, a few bad apples spoil the whole bunch. The IRS has learned that several individuals who were willful in their failure to report undisclosed foreign tax and bank information have been caught trying to sneak into the modified streamlined program in order to pay a reduced penalty – or avoid the penalty altogether This contradicts the IRS’ intention which was to modify and expand the Streamlined Offshore Disclosure Program to assist taxpayers who otherwise would be overburdened by having to enter the OVDP and opt out of the penalty structure.
There is No Reason to be Scared of the OVDP or the Streamlined Programs
The goal of this article is not to scare you. Rather, it is to warn you to just be cautious if you are entering into these programs. Way too many inexperienced and unscrupulous attorneys, CPAs and enrolled agents see these programs as a way to scare individuals.
If You are going to enter a Foreign Disclosure Program, use an Attorney
While CPAs and enrolled agents (who are not also attorneys) may charge less than an attorney is important to note that you do not have an attorney client privilege with CPAs and enrolled agents. What that means, is that if it turns out you wrongfully entered the streamlined program and the IRS wants to speak with your representative, unless your representative is an attorney, there is no privilege between a CPA and Taxpayer when a Criminal Matter is at issue.
Here is a link to recent article we authored “OVDP – Frequently Asked Questions”