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FBAR Court Cases (2018) – Updated FBAR Cases & FBAR Penalties

FBAR Court Cases (2018) - Updated FBAR Cases & FBAR Penalties (Golding & Golding)

FBAR Court Cases (2018) – Updated FBAR Cases & FBAR Penalties (Golding & Golding)

FBAR Court Cases (2018) – Updated FBAR Cases & FBAR Penalties

Despite all of the fear mongering and scaremongering you will undoubtedly come across in your online journey to learn about FBAR penalties, the penalties for non-reporting of foreign accounts can be bad

Common Question involving FBAR Cases & Penalties:

  • How do courts rule in FBAR cases?
  • Does the court always issues willful penalties?
  • How much are willful penalties?
  • Do courts put people in jail for FBAR?

FBAR Court Cases

With that said, not every case results in willful penalties or criminal prosecution, and with proper intervention via IRS Voluntary Disclosure/IRS Tax Amnesty, you may be able to limit, reduce or even avoid FBAR penalties altogether.

FBAR Penalties are Not Usually Criminal

Oftentimes, the result of FBAR penalties will be monetary fines. And, while the amount of the fine may far exceed any potential foreign account violation you may have committed, it still beats 10 years in prison.

Even FBAR civil willfulness penalties, which can be very severe, does not amount to a criminal violation.  While people will refer to willful penalties as being “criminal-like” due to the amount of penalties that can be issued, it does not make you a criminal.

FBAR Penalty Cases

To try to help better put FBAR penalties into perspective for you, we will provide you a summary of how the courts have ruled on certain FBAR cases — so you can better assess whether your facts would results in a willful penalty for non-willful penalty.

Case: Williams (III)

Williams Holding Summary

If a person sign the tax return, marks “No” on Schedule B, Question 7 and the facts otherwise show that the person acted fraudulently regarding their taxes, the court can impute willfulness without any true intent to not report foreign counts.

Why is Williams Important?

The Williams case is one of the most important cases involving FBAR violations, because it essentially establishes that intent is not necessary to prove willfulness. In Williams, the taxpayer has opened up some Swiss bank accounts, deposited $7 million in discounts, which earned significant interest income — but the interest was not included on his tax return.

As with the recent Manafort case, Williams’ CPA has provided him within organizer asking whether he had any individual ownership or signature authority over any foreign accounts, and he put “No”. Later, he disclosed the information to the IRS and indicated that he had foreign accounts.

Williams had some other issues with his taxes (and the apparent inability to tell the truth), and ended up pleading guilty to certain tax crimes. It was not until 2007 that he ended up filing this past FBARs for the prior years (1993-2000).

Initially, the IRS held that Williams should have to pay to civil penalties each in the amount of $100,000.  Williams never paid these penalties and as a result the IRS filed a lawsuit in order to collect the money.

District Court

At the District Court level become the judge found in favor of  Williams. The court held at the IRS did not meet its burden of showing that Williams acted willfully. The court concluded that there was no motivation to intentionally conceal the accounts because the IRS was already aware the account.

Fourth Circuit Reverses

The fourth circuit reversed the District Court’s holding and found that Williams had willfully violated FBAR requirements.  The court concluded that even if Williams’ actions were reckless conduct (and not actual “intent”), recklessness establishes willfulness in accordance with FBAR related violations

Essentially, the court held that Williams signed his return, identified “No” on schedule B and already admitted to various tax crimes – and when looking at the totality of the circumstances — Williams would be hard-pressed to show this conduct was not at least reckless.

The court then concludes that reckless conduct equates to form of willfulness and Willful FBAR Penalties are issued.

Case: Mcbride

McBride Holding Summary

The government does not need to show intent in order to prove willfulness in the context of FBAR Penalties. Rather, the government must only show reckless conduct, and reckless conduct includes willful blindness, even without direct evidence of willfulness.

Why is McBride Important?

McBride is an important case because it further reduces the threshold for the U.S Government to have to show that a person was willful in order for the IRS to enforce willful FBAR Penalties.  In McBride, taxpayer worked for a company that manufactured products overseas. The product became successful, and the company entered into various contracts around the world.

At all relevant times coming McBride had denied having any ownership for signature authority over any foreign accounts (even though he did), and he did not update his accountant regarding the foreign accounts.

Taxpayer found himself under investigation by the IRS for related matters, and instead of cooperating with the IRS, McBride denied all of the governments allegations, failed to cooperate with the IRS, and failed to submit FBARs.

The court referred back to the Williams case and agreed that willfulness in the context of FBAR violations is more than just willfulness; it also includes reckless behavior. Moreover, the Court essentially imputes a level of constructive knowledge to the taxpayer regarding the filing (the duty to file) the FBAR.

Namely, that since McBride sign the tax returns, it would be a constructive knowledge about the contents within the returns – and this would include the content to schedule B, which McBride identified “No,” that he did not have any foreign counts.

*In addition, it should also be noted that the court agreed that the preponderance of the evidence was the proper burden of proof – despite the IRS memo showing that even the IRS believed it should be “clearing convincing evidence” – similar to proving tax fraud.

Case: Bohanec

Bohanec Holding Summary

As with the prior, the court again confirms that reckless disregard this efficient the Government to meet the burden of willfulness, and the Government must only meet the preponderance of the evidence standard, and not clear convincing evidence.

Taxpayers had applied for OVDP and were initially approved for preclearance, but were later rejected because they had been untruthful on their OVDP application and subsequent filings.

Namely, they had not reported the true nature of the foreign deposits, had not reported all of the accounts in their disclosure (aka they did not make a “Full Disclosure) and overall did not tell the truth in their OVDP application; in other words, they selectively reported the money and accounts they wanted to – which is enough to get an applicant rejected or dismissed from OVDP/OVDI.

The Ninth Circuit case of U.S. v. Bohanec, the District Court held that the burden of proving a person was willful for financial penalties is met when a person is found to be in reckless disregard of filing FBAR forms (less than intent or deliberate actions taken), and the government’s burden is less than clear and convincing evidence.

As a result, the court concluded that the Taxpayers were willful and subject to willful penalties.

*This case essentially confirms the prior two cases and further illustrates the trend of reducing the U.S. Government’s burden in or to prove FBAR willfulness.

Case: Garrity

Garrity Holding Summary

The Government can provide Reckless Disregard to establish willfulness and the standard of proof is the preponderance of the evidence.

In the current case, Plaintiff filed this suit to reduce to judgment a civil penalty the Internal Revenue Service assessed against Paul G. Garrity, Sr., under 31 U.S.C. § 5321(a)(5), for his alleged willful failure to report his interest in a foreign account he held in 2005, in violation of 31 U.S.C. § 5314.

More specifically, the U.S. Government is seeking collection from Mr. Paul G. Garrity, Sr.’s estate.

The Government filed this action on February 20, 2015 to collect an outstanding civil penalty, known as the Report of Foreign Bank and Financial Accounts (“FBAR”) penalty, from the estate of Mr. Garrity, Sr., who died in 2008.

The Government had assessed the penalty against Mr. Garrity, Sr. for his allegedly willful failure to timely report his financial interest in, and/or his authority over, a foreign bank account for the 2005 calendar year, as required by 31 U.S.C. § 5314
and its implementing regulations. (ECF No. 1.)

An Important Takeaway – Money is Money

Even though the amount of money was possibly more than the taxpayer would be liable if it were Tax Fraud, the court concluded that even a lot of money does not raise the burden of proof.

The court provided: That Defendants may be liable for a substantially larger sum of money for a willful FBAR violation than if the Government had pursued a civil tax fraud action does not warrant a higher standard of proof, but that it is the type of interest or right involved that triggers a higher standard of proof, not the amount in controversy; courts have not viewed cases involving “even severe civil sanctions” to implicate “important individual interests or rights” to warrant a higher standard of proof.

Case: Bussell

Bussell Holding Summary

Despite the fact that in this case the Willful FBAR penalties exceeds $1 million, that in the end FBAR penalties (even willful), are just monetary penalties, and therefore the preponderance of the evidence standard of proof is proper.

Another import aspect of Bussell, is to give you an idea of what arguments are destined to fail on appeal, and that the Supreme Court refuses to hear the matter regarding what constitutes FBAR Penalties.

Background

“In June 2013, the IRS assessed an approximately $1.2 million penalty against Bussell for failing to disclose her financial interests in an overseas account on her 2006 tax return, which she was required to report in 2007. Bussell did not pay the penalty, and the government filed suit. Bussell previously had been criminally charged for concealing financial assets in 2002. On appeal, Bussell admits that she willfully failed to disclose her financial interests in her overseas account on her 2006 tax return.”

To give you an idea of what a legal “Hail Mary” looks like, here are Bussell’s arguments for a penalty waiver (as taken from the court appeals ruling)

1. First, Bussell contends that the IRS’s penalty against her violates the Eighth Amendment Excessive Fines Clause. Bussell bears the burden to prove that the fine against her violates the Constitution. See United States v. $132,245.00 in U.S. Currency, 764 F.3d 1055, 1058 (9th Cir. 2014) (explaining that the claimant has the burden of establishing that the forfeiture is grossly disproportional to the offense)//Bussell has failed to carry her burden to establish that the penalty is grossly disproportional to her offense. 2

2. Bussell also asserts that the government violated the statute of limitations by failing to bring its claim earlier. The applicable statute of limitations is six years. 31 U.S.C. § 5321(b)(1). Because Bussell failed to disclose her financial interests in 2007, the statute of limitations began to run at that time. The IRS assessed a penalty against Bussell within the statutory period in June 2013, and the government’s claim against Bussell is connected to that assessment. Therefore the government did not violate the statute of limitations. 

3. Bussell next asserts the assessment against her violated her due process rights because the government could have brought the claim against her earlier. Because the government’s claim is connected to Bussell’s failure to report assets in 2007, the government could not have brought its claim before 2007, and, as explained above, the government brought its claim within the statute of limitations. Therefore Bussell is not entitled

4. Because the Ex Post Facto clause does not apply to civil statutes unless they have a punitive purpose or effect, see Smith v. Doe, 538 U.S. 84, 92 (2003), it is not applicable here. 

5. Bussell also asserts that she has received “multiple punishments” for the same underlying offense. Even if the funds at issue here were traceable to the funds at issue in her criminal prosecution, the offense here, failing to report her foreign bank account on her 2006 tax return, was unrelated to her criminal conviction.

6. Bussell suggests that the IRS abused its discretion in calculating the penalty amount, and that the district court committed legal error by not engaging in analysis of the reasonableness of the penalty. Because the district court reviewed Bussell’s penalty when it reduced it, and the assessment is consistent with the limits set by Congress, see Mackby, 339 F.3d at 1017–18 (explaining the penalties available under the False Claims Act, 31 U.S.C. §§ 3729–3733), Bussell has not shown that the district court erred in reviewing the assessment against her.

7. Bussell next argues that the government’s claim is barred by laches. Bussell offers no authority for applying laches against the government in this context. Generally, the United States “is not bound by . . . laches in enforcing its rights.” Chevron, U.S.A., Inc. v. United States, 705 F.2d 1487, 1491 (9th Cir. 1983); see Costello v. United States, 365 U.S. 265, 281 (1961) (noting that the 5 Court has “consistently adhered” to the principle that “laches is not a defense against the sovereign”). Therefore, Bussell’s laches defense is inapplicable here.

8. Lastly, Bussell argues that introduction of banking evidence at the district court violated an international treaty between the United States and Switzerland. Because Bussell has not shown that the treaty she relies on creates an enforceable right, see United States v. Mann, 829 F.2d 849, 852 (9th Cir. 1987), Bussell is not entitled to relief under this theory.

On Apr. 30, 2018, the Supreme court refused to review the Ninth Circuit’s decision. Accordingly, that decision is now final.

Case: Bedrosian

This is an example of a case in which the court found the taxpayer was non-willful. The underlying facts are a bit convoluted. Essentially, what seems to have happened is that the taxpayer wanted to fix the problem and wanted to submit to OVDI.

Bedrosian attempted to enter OVDI, but didn’t want to pay the penalty, but was recommended by IRS agent to opt out. His OVDI was rejected but he was audited anyway, and the examiner determined he was non-willful.  Thereafter, a different agent determined he was willful (without examining the taxpayer) and issues willful FBAR Penalties.

Bedrosian disputed the amount, and the court ultimately ruled In his favor. The court determined that it is unclear that Bedrosian intended on defrauding the US government.

We Specialize in IRS Voluntary Disclosure

We have successfully handled a diverse range of IRS Voluntary Disclosure cases. Whether it is a simple or complex case, safely getting clients into compliance is our passion, and we take it very seriously.

Unlike other attorneys who call themselves specialists but handle 10 different areas of tax law, purchase multiple domain names, and even practice outside of tax, we are absolutely dedicated to IRS Voluntary Disclosure.

No Case is Too Big; No Case is Too Small.

We represent all different types of clients. High net-worth investors (over $40 million), smaller cases ($100,000) and everything in-between.

We represent clients in over 60 countries and nationwide, with all different types of assets, including (each link takes you to a Golding & Golding free summary):

Who Decides to Enter IRS Voluntary Disclosure

All different types of people submit to IRS Voluntary Disclosure. We represent Attorneys, CPAs, Doctors, Investors, Engineers, Business Owners, Entrepreneurs, Professors, Athletes, Actors, Entry-Level staff, Students, and more.

You are not alone, and you are not the only one to find himself or herself in this situation.

…We even represent IRS Staff with getting into compliance.

Sean M. Golding, JD, LL.M., EA – Board Certified Tax Law Specialist

Our Managing Partner, Sean M. Golding, JD, LLM, EA is the only Attorney nationwide who has earned the Certified Tax Law Specialist credential and specializes in IRS Offshore Voluntary Disclosure and closely related matters.

In addition to earning the Certified Tax Law Certification, Sean also holds an LL.M. (Master’s in Tax Law) from the University of Denver and is also an Enrolled Agent (the highest credential awarded by the IRS.) 

He is frequently called upon to lecture and write on issues involving IRS Voluntary Disclosure.

*Click Here to Learn about how Attorneys falsely market their services as “specialists.”

Less than 1% of Tax Attorneys Nationwide

Out of more than 200,000 practicing attorneys in California, less than 400 attorneys have achieved this Certified Tax Law Specialist designation.

The exam is widely regarded as one of (if not) the hardest tax exam given in the United States for practicing Attorneys. It is a designation earned by less than 1% of attorneys.

Our International Tax Lawyers represent hundreds of taxpayers annually in over 60 countries.

IRS Offshore Penalty List

The following is a list of potential IRS penalties for unreported and undisclosed foreign accounts and assets:

A Penalty for failing to file FBARs

United States citizens, residents and certain other persons must annually report their direct or indirect financial interest in, or signature authority (or other authority that is comparable to signature authority) over, a financial account that is maintained with a financial institution located in a foreign country if, for any calendar year, the aggregate value of all foreign financial accounts exceeded $10,000 at any time during the year. The civil penalty for willfully failing to file an FBAR can be as high as the greater of $100,000 or 50 percent of the total balance of the foreign financial account per violation. See 31 U.S.C. § 5321(a)(5). Non-willful violations that the IRS determines were not due to reasonable cause are subject to a $10,000 penalty per violation.

FATCA Form 8938

Beginning with the 2011 tax year, a penalty for failing to file Form 8938 reporting the taxpayer’s interest in certain foreign financial assets, including financial accounts, certain foreign securities, and interests in foreign entities, as required by IRC § 6038D. The penalty for failing to file each one of these information returns is $10,000, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50,000 per return.

A Penalty for failing to file Form 3520

Annual Return to Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts. Taxpayers must also report various transactions involving foreign trusts, including creation of a foreign trust by a United States person, transfers of property from a United States person to a foreign trust and receipt of distributions from foreign trusts under IRC § 6048. This return also reports the receipt of gifts from foreign entities under IRC § 6039F. The penalty for failing to file each one of these information returns, or for filing an incomplete return, is the greater of $10,000 or 35 percent of the gross reportable amount, except for returns reporting gifts, where the penalty is five percent of the gift per month, up to a maximum penalty of 25 percent of the gift.

A Penalty for failing to file Form 3520-A

Information Return of Foreign Trust With a U.S. Owner. Taxpayers must also report ownership interests in foreign trusts, by United States persons with various interests in and powers over those trusts under IRC § 6048(b). The penalty for failing to file each one of these information returns or for filing an incomplete return, is the greater of $10,000 or 5 percent of the gross value of trust assets determined to be owned by the United States person.

A Penalty for failing to file Form 5471

Information Return of U.S. Persons with Respect to Certain Foreign Corporations. Certain United States persons who are officers, directors or shareholders in certain foreign corporations (including International Business Corporations) are required to report information under IRC §§ 6035, 6038 and 6046. The penalty for failing to file each one of these information returns is $10,000, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50,000 per return.

A Penalty for failing to file Form 5472

Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business. Taxpayers may be required to report transactions between a 25 percent foreign-owned domestic corporation or a foreign corporation engaged in a trade or business in the United States and a related party as required by IRC §§ 6038A and 6038C. The penalty for failing to file each one of these information returns, or to keep certain records regarding reportable transactions, is $10,000, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency.

A Penalty for failing to file Form 926

Return by a U.S. Transferor of Property to a Foreign Corporation. Taxpayers are required to report transfers of property to foreign corporations and other information under IRC § 6038B. The penalty for failing to file each one of these information returns is ten percent of the value of the property transferred, up to a maximum of $100,000 per return, with no limit if the failure to report the transfer was intentional.

A Penalty for failing to file Form 8865

Return of U.S. Persons With Respect to Certain Foreign Partnerships. United States persons with certain interests in foreign partnerships use this form to report interests in and transactions of the foreign partnerships, transfers of property to the foreign partnerships, and acquisitions, dispositions and changes in foreign partnership interests under IRC §§ 6038, 6038B, and 6046A. Penalties include $10,000 for failure to file each return, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50,000 per return, and ten percent of the value of any transferred property that is not reported, subject to a $100,000 limit.

Fraud penalties imposed under IRC §§ 6651(f) or 6663

Where an underpayment of tax, or a failure to file a tax return, is due to fraud, the taxpayer is liable for penalties that, although calculated differently, essentially amount to 75 percent of the unpaid tax.

A Penalty for failing to file a tax return imposed under IRC § 6651(a)(1)

Generally, taxpayers are required to file income tax returns. If a taxpayer fails to do so, a penalty of 5 percent of the balance due, plus an additional 5 percent for each month or fraction thereof during which the failure continues may be imposed. The penalty shall not exceed 25 percent.

A Penalty for failing to pay the amount of tax shown on the return under IRC § 6651(a)(2)

If a taxpayer fails to pay the amount of tax shown on the return, he or she may be liable for a penalty of .5 percent of the amount of tax shown on the return, plus an additional .5 percent for each additional month or fraction thereof that the amount remains unpaid, not exceeding 25 percent.

An Accuracy-Related Penalty on underpayments imposed under IRC § 6662

Depending upon which component of the accuracy-related penalty is applicable, a taxpayer may be liable for a 20 percent or 40 percent penalty

Possible Criminal Charges related to tax matters include tax evasion (IRC § 7201)

Filing a false return (IRC § 7206(1)) and failure to file an income tax return (IRC § 7203). Willfully failing to file an FBAR and willfully filing a false FBAR are both violations that are subject to criminal penalties under 31 U.S.C. § 5322.  Additional possible criminal charges include conspiracy to defraud the government with respect to claims (18 U.S.C. § 286) and conspiracy to commit offense or to defraud the United States (18 U.S.C. § 371).

A person convicted of tax evasion 

Filing a false return subjects a person to a prison term of up to three years and a fine of up to $250,000. A person who fails to file a tax return is subject to a prison term of up to one year and a fine of up to $100,000. Failing to file an FBAR subjects a person to a prison term of up to ten years and criminal penalties of up to $500,000.  A person convicted of conspiracy to defraud the government with respect to claims is subject to a prison term of up to not more than 10 years or a fine of up to $250,000.  A person convicted of conspiracy to commit offense or to defraud the United States is subject to a prison term of not more than five years and a fine of up to $250,000.

What Should You Do?

Everyone makes mistakes. If at some point that you should have been reporting your foreign income, accounts, assets or investments the prudent and least costly (but most effective) method for getting compliance is through one of the approved IRS offshore voluntary disclosure program.

Summary of IRS Offshore Voluntary Disclosure

IRS Voluntary Disclosure of Foreign or Offshore Accounts is a legal method for getting into IRS Tax and Reporting compliance before the IRS finds you first.  At Golding & Golding, we limit our entire tax law practice to IRS Offshore Voluntary Disclosure. 

Why IRS Voluntary Disclosure?

With the introduction and enforcement of FATCA (Foreign Account Tax Compliance Act) and FATCA penalties, coupled by the renewed interest in the IRS issuing FBAR (Report of Foreign Bank and Financial Account Form aka FinCEN 114) penalties — which are both very steep – it is typically a better strategy to be proactive and get into compliance, than to play “defense.”

FBAR penalties alone can reach ~$12,500 per account, per year (adjusted inflation from $10,000). While this is the maximum penalty, the “recommended penalty” is still $12,500 per year (usually 3-6 years). 

4 Types of IRS Offshore Voluntary Disclosure Programs

There are typically four types of IRS Offshore Voluntary Disclosure programs, and they include:

  • Offshore Voluntary Disclosure Program (OVDP)
  • Streamlined Domestic Offshore Procedures (SDOP)
  • Streamlined Foreign Offshore Procedures (SFOP)
  • Reasonable Cause (RC)

IRS Voluntary Disclosure of Offshore Accounts

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:

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.

Golding & Golding – Offshore Disclosure

At Golding & Golding, we limit our entire practice to offshore disclosure (IRS Voluntary Disclosure of Foreign and U.S. Assets). The term offshore disclosure is a bit of a misnomer, because the term “offshore” generally connotes visions of hiding money in secret places such as the Cayman Islands, Bahamas, Malta, or any other well-known tax haven jurisdiction – but that is not the case.

In fact, any money that is outside of the United States is considered to be offshore; the term offshore is not a bad word. In other words, merely because a person has money offshore (a.k.a. overseas or in a foreign country) does not mean that money is the result of ill-gotten gains or that the money is being “hidden.”

It just means it is not in the United States. Many of our clients have assets and bank accounts in their homeland countries and these are considered offshore assets and offshore bank accounts.

The Devil is in the Details…

If you do have money offshore, then it is very important to ensure that the money has been properly reported to the U.S. government. In addition, it is also very important to ensure that if you are earning any foreign income from that offshore money, that the earnings are being reported on your U.S. tax return.

It does not matter whether your money is in a country that does not tax a particular category of income (for example, many Asian countries do not tax passive income). It also does not matter if you are a dual citizen and/or if that money has already been taxed in the foreign country.

Rather, the default position is that if you are required to file a U.S. tax return and you meet the minimum threshold requirements for filing a U.S. tax return, then you have to include all of your foreign income. If you already paid foreign tax on the income, you may qualify for a Foreign Tax Credit. In addition, if the income is earned income – as opposed to passive income – and you meet either the Bona-Fide Resident Test or Physical-Presence Test, then you may qualify for an exclusion of that income; nevertheless, the money must be included on your tax return.

What if You Never Report the Money?

If you are in the unfortunate position of having foreign money or specified foreign assets that should have been reported to the U.S. government, but which you have not reported —  then you are in a bit of a predicament, which you will need to resolve before it is too late.

As we have indicated numerous times on our website, there are very unscrupulous CPAs, Attorneys, Accountants, and Tax Representatives who would like nothing more than to get you to part with all of your money by scaring you into believing you are automatically going to be arrested, jailed, or deported because you have unreported money. While that is most likely not the case (depending on the facts and circumstances of your specific situation), you may be subject to extremely high fines and penalties.

Moreover, if you knowingly or willfully hid your foreign accounts, foreign money, and offshore assets overseas, then you may become subject to even higher fines and penalties…as well as a criminal investigation by the special agents of the IRS and/or DOJ (Department of Justice).

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

  • OVDP
  • 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.

1. OVDP (Ends on 9.28.18)

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).

OVDP Penalties

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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