- 1 Should I Disclose my Overseas Accounts?
- 2 Can I Still Be Assessed Form 5471 Penalties?
- 3 FBAR Penalties Case Update (Bittner)
- 4 Getting into IRS Offshore Compliance
- 5 First, How Will the US Government React to the Recent Tax Court Ruling?
- 6 Pros to IRS Offshore Disclosure
- 7 Taxpayers Gets to Provide the Narrative
- 8 Non-Willful vs Willful (Offensive vs Defensive)
- 9 The Penalty can be Waived or Limited
- 10 IRS Can Change the Program or Eliminate Amnesty Programs
- 11 The IRS Can Still File a Lawsuit
- 12 Peace of Mind
- 13 Cons to IRS Offshore Disclosure
- 14 The Taxpayer May Never Be Issued a Penalty
- 15 No Refund Under the Streamlined Procedures
- 16 Your Streamlined FBAR Penalty is More than Non-Streamlined
- 17 Current Year vs Prior Year Non-Compliance
- 18 Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)
- 19 Golding & Golding: About Our International Tax Law Firm
Should I Disclose my Overseas Accounts?
Foreign accounts disclosure is the process of submitting prior year, previously undisclosed foreign account, asset, investment, and income information to the US government (IRS and FinCEN) in order to get into tax and reporting compliance. The IRS offers various ‘amnesty’ programs and there have been many versions of these different programs over the years. Currently the four main programs/procedures include:
IRS Voluntary Disclosure Program
Streamlined Filing Compliance Procedures
Reasonable Cause as an alternative to Streamlined or Delinquency
Can I Still Be Assessed Form 5471 Penalties?
Recently, there was a United States Tax Court case (Farhy) in early April of 2023 in which the court ruled that the Internal Revenue Service does not have the right to assess penalties for failing to file Form 5471 — because the statute (Section 6038) does not authorize the IRS to do. In general, Taxpayers with certain foreign assets are required to report the assets annually on IRS international information reporting forms such as Form 5471, 3520, and others. When applying the Tax Court’s methodology for why the IRS lacks authority to issue Form 5471 penalties, it would appear the IRS also lacks authority to issue other penalties as well.
FBAR Penalties Case Update (Bittner)
In addition to Farhy, there was the recent Supreme Court case of Bittner, in which the Supreme Court limited FBAR penalties to one $10,000 penalty per year instead of one penalty per account per year — noting, that the $10,000 adjusts for inflation.
Getting into IRS Offshore Compliance
With these new 2023 rulings – and presumably additional court rulings coming down the pipeline — what is a Taxpayer to do when they realize that they are out of compliance?
Let’s take a look at some of the pros and the cons to making a foreign account disclosure.
First, How Will the US Government React to the Recent Tax Court Ruling?
How the Internal Revenue Service reacts to the ruling by the Tax Court is important. For example, will the IRS Appeal the ruling? If not, the IRS may acquiesce to the ruling or issue a nonacquiescence instead. In addition, the US government can always revise the statute granting it authority to assess penalties in these types of situations.
Pros to IRS Offshore Disclosure
Let’s start with some of the benefits to the IRS offshore disclosure program.
Taxpayers Gets to Provide the Narrative
First, with offshore disclosure, the Taxpayer gets the opportunity to present the narrative to the IRS instead of being on the defensive. Thus, the Taxpayer gets to set the cast of characters and make their presentation to the IRS as to why they were non-willful (Streamlined or Delinquency). If instead, the Taxpayers is willful, then they get to present their position under VDP before the IRS potentially launches a criminal investigation. Noting, that just because someone is willful in the civil arena does not mean that they are criminally willful.
Non-Willful vs Willful (Offensive vs Defensive)
When a taxpayer believes they are non-willful, it is typically easier for them to make that presentation on the offensive than it is to be on the defensive — and have to defend IRS claims that the taxpayer is willful.
The Penalty can be Waived or Limited
Depending on which program the taxpayer qualifies for such as the Streamlined Foreign Offshore Procedures, the Taxpayer may be able to get into full compliance without any offshore penalties. Since the ultimate goal of taxpayers seeking to get into compliance is to be compliant with the IRS, the Streamline Foreign (SFOP) is a great program for those who qualify for it.
IRS Can Change the Program or Eliminate Amnesty Programs
The IRS has the authority to cancel or revise the programs at any time. For example, in 2018 the IRS terminated the OVDP Program — and Taxpayers who waited to submit to the program ended up paying a significantly higher penalty than those who submitted to the program at an earlier date.
The IRS Can Still File a Lawsuit
It is important to keep in mind that while the Tax Court ruling limits the IRS’s ability to go after Taxpayers via issuing assessable penalties, that does not mean that the IRS is prevented from going after the Taxpayers in court. Even the Court in Farhy confirmed that the IRS still has that ability to file a lawsuit against Taxpayers. And, while the IRS will not be able to file lawsuits against everyone for every violation of 5471 and other international information reporting forms, that is a risk that many taxpayers simply do not want to take.
Peace of Mind
There is a general sense of relief by many taxpayers who take the necessary steps to proactively get into compliance. This reduction of stress and the ability to move forward with future filings (and life in general) can bring a sense of satisfaction to many taxpayers.
Cons to IRS Offshore Disclosure
While there are many benefits to submitting to offshore disclosure, there are some other considerations to be aware of as well, especially for taxpayers who may not want to submit and are looking for reasons not to.
The Taxpayer May Never Be Issued a Penalty
There is no guarantee that the IRS will find you, and even if they do, depending on how the next batch of litigation turns out in Tax Court and Federal Court, the IRS may not have the immediate ability to go after as many taxpayers as they would like.
No Refund Under the Streamlined Procedures
Directly in the content of the streamline procedures certification form is verbiage that disallows a taxpayer to seek a refund under the Streamlined Filing Compliance Procedures. Entering the streamlined procedures is a voluntary submission process and even if the law was to change in the future — chances are that Taxpayers would be estopped from seeking a refund based on the certification form they sign.
Your Streamlined FBAR Penalty is More than Non-Streamlined
For some Taxpayers who are clearly non-willful but have significant amounts of unreported accounts along with some income – they will not qualify for Delinquency Procedures – but may not want to submit to the Streamlined Procedures, because the penalty under the streamline procedures may be too high and not warranted – especially in light of Bittner. For example, a Taxpayer may be non-willful but has $8 million worth of foreign accounts. Under SFCP, they would have to voluntarily succumb to a $400,000 penalty under SDOP. Taxpayers especially in this type of situation should speak with a Board-Certified Tax Law Specialist to evaluate the different options in order to safely and legally get into compliance by considering Reasonable Cause as an alternative.
Current Year vs Prior Year Non-Compliance
Once a taxpayer has missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, taxpayers should consider speaking with a Board-Certified Tax Law Specialist that specializes exclusively in these types of offshore disclosure matters.
Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)
In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties.
Golding & Golding: About Our International Tax Law Firm
Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure.
Contact our firm today for assistance.