With the implementation of FATCA (Foreign Account Tax Compliance Act), it is becoming more and more difficult for individuals and businesses with foreign accounts that are undisclosed to keep them hidden from the IRS.

Golding & Golding – International Business Tax Lawyers

The reason why is because under FATCA, foreign countries are proactively reporting individuals and entities that have foreign accounts to the Internal Revenue Service. Moreover, because compliance with FATCA has become very burdensome for many countries, many foreign countries are taking the path of least resistance to facilitate compliance with IRS and DOT rules and regulations by simply reporting anybody in their databases who has accounts in their foreign country but do not qualify as a foreign citizen.

Over the past year, we have represented numerous people who received a dreaded FATCA Letter simply because they have an address in the United States, or at one point in time had an address in the United States.

As you may know, the penalties for failing to comply with FATCA are staggering and far outweigh the actual “damage” you have done to the United States by failing to report a bank account.

Some of those penalties include:

FBAR PENALTIES

Willful

Essentially, somebody has acted willful they intentionally invaded taxes. In other words, they willfully or knowingly “knew” about the requirement to disclose and report overseas assets, accounts, and income but chose not. 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.

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 form bank account and you knowingly did not report this information to the IRS and the audit you for three years and they can take all of your $1 million.

Non-Willful

In these situations, the IRS has four 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 had not yet complied with FATCA or international reporting requirements, but since they were audited did not qualify for one of the IRS offshore voluntary disclosure program).
  • The IRS agent could penalize the taxpayer $10,000 for all of the years that the taxpayer did not file FBAR statements. For example, if you are audited for three years and did not file FBARs for those three years, the IRS is authorized to penalize you $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 total value of the account
  • The IRS agent could penalize the taxpayer $10,000 per account per year. In other words, if the taxpayer has four different bank accounts and was audited for three years – the IRS could penalize taxpayer $120,000.

*There is also an “Exception” to the FBAR penalty for Reasonable Cause, but even with the Reasonable Cause Exception, the IRS can still penalize the person under the FBAR penalties up to $10,000.

                                                     

IRS FORM 8938 PENALTIES

If you are required to file Form 8938 but do not file a complete and correct Form 8938 by the due date (including extensions), you may be subject to a penalty of $10,000.

  • Continuing failure to fileIf you do not file a correct and complete Form 8938 within 90 days after the IRS mails you a notice of the failure to file, you may be subject to an additional penalty of $10,000 for each 30-day period (or part of a period) during which you continue to fail to file Form 8938 after the 90-day period has expired. The maximum additional penalty for a continuing failure to file Form 8938 is $50,000.
  • Married taxpayers filing a joint income tax returnIf you are married and you and your spouse file a joint income tax return, the failure to file penalties apply as if you and your spouse were a single person. You and your spouse’s liability for all penalties is joint and several.
  • Presumption of maximum value: If the IRS determines that you have an interest in one or more specified foreign financial assets and asks you for information about the value of any asset, but you do not provide enough information for the IRS to determine the value of the asset, you are presumed to own specified foreign financial assets with a value of more than the reporting threshold that applies to you. See Determining the Reporting Threshold That Applies to You, earlier. In such case you are subject to the failure-to-file penalties if you do not file Form 8938.
  • Reasonable cause exceptionNo penalty will be imposed if you fail to file Form 8938 or to disclose one or more specified foreign financial assets on Form 8938 and the failure is due to reasonable cause and not to willful neglect. You must affirmatively show the facts that support a reasonable cause claim.

                                                     

REASONABLE CAUSE STATEMENTS

When it comes to the reasonable cause statement, the IRS does not want to back itself into a corner. Therefore, the Internal Revenue Service does not provide samples of reasonable cause statements (or really any guidance) as to what is considered reasonable cause – beyond the fact that reasonable cause is determined on a case-by-case basis.

By submitting a reasonable cause statement you are essentially asking the Internal Revenue Service to understand that the reason why you failed to file either the 8938 or FBAR was because you were unaware of the requirement to do so and this failure to do so was reasonable or “a normal mistake.” What the Internal Revenue Service does not tell you is about all the pitfalls and inherent risks that are also included in failing to file a reasonable cause statement:

You have admitted your “crime

By submitting a reasonable cause statement you are putting yourself at the mercy of the Internal Revenue Service. While each person’s specific circumstances and communications with the IRS will vary, generally the Internal Revenue Service is not known for their “empathy.” Thus, often times a reasonable cause statement may be rejected and now not only have you failed to get your penalty waived, but you have admitted that you are out of FBAR compliance.

 

Self-Incrimination

Unfortunately, we have represented numerous people who have submitted reasonable cause statements (before retaining counsel) without realizing what they actually did was not “reasonable cause” under the statute — but actually fraud.

  • Here’s an example: Michelle has two bank accounts overseas that she received from an inheritance in which he does not access. Since she never uses the accounts, and the foreign bank withdraws 15% each year for taxes, she does not file either an 8938 or FBAR. In her reasonable cause statement, she explains that she was aware she was required to do so but since it was an inheritance, she never really accessed the account and did not think she should have to file it.
  • In this example, not only did Michelle “not” have reasonable cause (since she acknowledged that she was required to file the form) which is all but admitted that she had knowingly, but she willfully failed to submit documentation to the Internal Revenue Service and now may be subject to willful penalties – which can reach 100% of the account value.

                                        

Under Examination usually means Disqualification from OVDP or Streamlined

This is one of the biggest problems with a reasonable cause statement. That is, if you submit this statement instead of being approved and you are audited or investigated by the Internal Revenue Service, then you almost always lose the right to submit to one of the Offshore Voluntary Disclosure Programs. Therefore, you may be better off submitting to the Streamlined Program.

  • Under the new laws and guidelines, if you qualify as non-willful (which most people who would want to submit a reasonable cause statement would) there are significantly reduced penalties if you enter one of the “streamlined” programs.
  • Further, if you happened to have lived overseas for at least 330 days in any of the last three years and you may qualify to have all of your penalties removed in accordance with the foreign offshore streamlined program. What is important to keep in mind is that you can only enter these programs if you are not under audit or examination by the IRS.
  • Therefore, if as a result of your reasonable cause statement the Internal Revenue Service determines it wants to investigate or audit you further (on either a domestic or foreign tax related issue) then you will usually (and quickly) become disqualified from entering either one of these programs.

In the end, while submitting reasonable cause statement seems like a “reasonable” alternative to entering one of the voluntary disclosure programs, it is usually is not the best alternative. Most of the time, Internal Revenue Service will still want to issue some sort of penalty against you (for FBARs and 8938s) and therefore all you really are doing is incriminating yourself to the IRS and losing the right to enter a voluntary disclosure program.

As a side note, under other circumstances a reasonable cause statement may be of benefit to you – but that is based on to case-by-case scenario (failure to file 3520, 5471, 5472 form, etc.)