FATCA Lawyers – Expats U.S. Tax Returns and FBARs | International Tax
When a person relocates to a foreign country for a long stretch of time or even permanently, they still have reporting requirements to the United States.
Specifically, the person earns the minimal threshold income than they must still file a US tax return – even if they live overseas and even if all of their income was from foreign sources.
Worldwide Income Requirements
The United States taxes US persons on the worldwide (for purposes of taxation a US person includes a US citizen, Legal Permanent Resident, or for national subject to the US tax base and the Substantial Presence Test). It does not matter if the person resides overseas, earns all of his income from foreign sources, or earns passive income in the country that does not tax passive income (several Asian countries for example).
When it comes to reporting foreign financial accounts, under FBAR filing rules, a person must file an annual FBAR (Report of Foreign Bank and Financial Account) form when their annual aggregate total of foreign accounts exceeds $10,000. The person without fails to file this form, files it late, or intentionally eliminates certain accounts from the form it can have a catastrophic financial impact on the person not the least being a 100% penalty against the value of the accounts.
Golding & Golding has provided a summary below of FATCA, followed by a summary of FBAR requirements:
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.
The United States takes FBAR reporting and compliance very seriously, and if not handled carefully a person may find themselves, their trust, or their business subject to significant taxes, fines, penalties, interest and possible criminal investigation.
When do I File an FBAR?
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).
What Accounts are Reported on an FBAR?
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 (FBAR) 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 and filing an untimely FBAR.
**UPDATE: Starting in 2016 for Tax Year 2015 – filing of your 2015 FBAR will be in accordance with the same time periods to file your tax returns, which is by April, 2016 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 11 bank accounts with $1000 each 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 on your FBAR 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.
FBAR – 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.
FBAR – Non-Willful
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 or file FBAR Reasonable Cause Statements 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.