Foreign Banks Report Citizens & Green-Card Holders to the IRS — Limited Time to Comply with FATCA
If your foreign bank or foreign financial institution has contacted you regarding your U.S. tax status (usually by asking you to complete either a W-9 or W-8 BEN), you must act quickly.
Why? This is usually the last step before the foreign bank or foreign financial institution reports your information to the United States government in accordance with FATCA (Foreign Account Tax Compliance Act) rules and regulations.
What is FATCA
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.
What if I did Not Report my Accounts to the IRS?
While there are numerous forms, which may need to be filed-the most common form is the FBAR (Report of Foreign Bank and Financial Accounts) and the failure to file it can result in very high fines and penalties.
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.
Getting into Compliance
The fastest and least painful way to get into compliance is usually through Offshore Disclosure. The two main programs are the Offshore Voluntary Disclosure Program (OVDP) and the IRS Streamlined Disclosure Program (aka Streamlined Compliance Procedures). The difference between these two programs is summarized for you below:
At Golding & Golding, we have successfully handled numerous OVDP (Offshore Voluntary Disclosure Program) and IRS Streamlined Program applications for individuals and businesses around the globe with outstanding unreported foreign accounts ranging from $50,000.00 to over $35,000,000.00
Click Here to learn about some of our more recent OVDP and Streamlined accomplishments.
In order to assist you better understand the distinction between the two different IRS foreign account disclosure programs, we are providing the following summary for your reference:
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 a person enters Offshore Voluntary Disclosure Program (OVDP) or the IRS Streamlined Offshore Disclosure Program will depend on the facts and circumstances of each taxpayer’s situation. No 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 to the IRS and U.S. Government.
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 you choose the “Reasonable Cause/Delinquency FBAR Submission” option and the IRS does not believe you, you may be subject to IRS Audit and/or examination, as well as being disqualified from entering either the OVDP or Streamlined Program. Worse yet, the IRS has all of your unreported and undisclosed foreign account and foreign income information – which can lead to serious fines and penalties.
**If the taxpayer submits the forms to the IRS without submitting to the FBAR Delinquency/Reasonable Cause or IRS Disclosure Programs, it can be considered a “silent disclosure” or “quiet disclosure.” If the IRS learns of the Quiet or Silent Disclosure, the 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.