Foreign Bank Account Reporting: Ever since the introduction of the FBAR (FinCEN Form 114) through FinCEN (The Financial Crimes Enforcement Network) back in the 1970s, the U.S. made enforcement of Offshore Reporting a key priority.
In addition, with the recent enactment and enforcement of FATCA (Foreign Account Tax Compliance Act) through Form 8938, the IRS has now ramped up enforcement of Offshore Reporting — along with actively levying Fines and Penalties for non-compliance.
If you are out-of-compliance, you have several options for legal getting back into compliance.
Key Reporting Terms
As you continue your research on FBAR, FATCA and Offshore Disclosure, there are a few terms you should keep in mind:
– FBAR (FinCEN 114): This is the Report of Foreign Bank and Financial Account Form. It is required for U.S. Person with more than $10,000 in annual aggregate total in foreign accounts on any given day of the year. This is filed separately from your Tax Return
– FBAR Filing: This is the process of filing your FBAR directly on the BSA website.
– BSA and BSA E- Filing: Refers to the Bank Secrecy Act. While it sounds very “Cloak and Dagger,” it’s not – it is the same site whether you have accounts in Switzerland, Cayman Islands, Bahamas, Japan or India.
– FATCA Form 8938: The is the Foreign Account Tax Compliance Act Form for Individuals. It is to report “Specified Foreign Financial Assets.” It is filed along with your Tax Return, if you meet the threshold requirements.
Foreign Bank Account Reporting
If you have foreign accounts that have not been reported to the IRS and are concerned that you may get into trouble – your concerns are valid.
While there are many individuals who will maintain offshore accounts and never be contacted by the IRS, for the individuals who are not so lucky –they may find themselves facing significant FBAR fines and penalties.
Moreover, if the IRS believes the person acted intentionally, willfully, with reckless disregard – or willfully omitted certain facts on their tax returns or during audit – they may be subject to much more extensive fines and penalties.
Why Are Foreign Banks Reporting
It is not just the United States seeking to reduce international tax for. The world as a whole is seeking to cut down offshore tax evasion and fraud. Why? Because unless the country is a tax haven (and proactively seeking individuals to open foreign trusts, foundations, or other investments in the country) the country is losing out on tax money.
In the United States for example, there is a worldwide income tax and reporting responsibility. That means, if you are considered a US person, then you’re also required to include your worldwide income under US tax return. It doesn’t matter if the money is earned in a foreign country, and it doesn’t matter if the money earned in the foreign country is considered tax-free.
As a general proposition, all income must be reported on a US tax return, despite any tax exemptions or exclusions in may receive in the foreign jurisdiction.
Non-Compliance of Reporting
In addition to including income a person earns in a foreign jurisdiction on the US tax return, the person is also required to report certain accounts and investments that they have.
The two main reporting requirements are in accordance with FBAR Filing and FATCA Reporting.
The essence of these reporting requirements is that once a person needs certain threshold requirements that are required to report their accounts and specified foreign financial assets on various forms such as the FBAR and FATCA form 8938.
While these two forms are the more prevalent forms, there does a few in the numerous potential forms a person may have to file, depending on whether they have foreign investments, PFIC, CFCs, Foreign Life Insurance, etc.
Offshore Tax Evasion and Fraud
This seems to be a general misunderstanding that a person has to have several million dollars hidden offshore to even be subject to criminal tax, offshore fraud or offshore tax evasion – but that is incorrect. The IRS does not limit their investigations to just “Big Fish.”
It is a simple is the fact that if a person has unreported income that they knew they were supposed to report but intentionally did not report the income on their tax return – they can be guilty of a crime, such as Tax Fraud, Tax Evasion and/or Money Laundering
Not everybody is going to be investigated and not everybody’s going to be audited or examined. But, if the person finds themselves under audit in a situation in which they already know they commit a crime (eggshell audit) will reverse situation in which they are under audit but are not aware that the IRS already knows that they committed some form of crime (reverse eggshell audit) and is not truthful or does handle the audit properly – it may spell trouble.
Be Proactive, Get Into Compliance with Offshore Disclosure
The IRS offshore voluntary disclosure programs are programs designed to bring people safely into compliance. Depending on the facts and circumstances of a person’s case will help determine which offshore disclosure program may qualify for.
By entering the program, a person may avoid even more excessive fines and penalties in accordance with US taw law.
If you are found to be willful and intentionally misrepresented your case to the IRS, you may be subject to extremely high fines and penalties beyond what you may have already paid.
The following is a summary of penalties as published by the IRS on their own website:
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.
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.
Underpayment & Fraud Penalties
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.
Even Criminal Charges are Possible…
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 is subject to a prison term of up to five years and a fine of up to $250,000. 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.