IRS Offshore Tax Audit Penalties vs. Voluntary Disclosure Penalties | Golding & Golding
- 0.1 I am So Scared I Can’t Sleep
- 0.2 Voluntary Disclosure Before Audit – Penalty Reduction
- 0.3 Non-Willful Voluntary Disclosure
- 0.4 Willful Voluntary Disclosure
- 0.5 What does OVDP Closure Cost?
- 0.6 Being Proactive vs. Defensive
- 0.7 What are the Penalties for Unreported Foreign Money
- 0.9 Want to Learn More about Offshore Disclosure?
- 0.10 Golding & Golding – Offshore Disclosure
- 0.11 The Devil is in the Details…
- 0.12 What if you Never Report the Money?
- 0.13 Getting into Compliance
- 0.14 OVDP
- 0.15 Streamlined Domestic Offshore Disclosure
- 0.16 Streamlined Foreign Offshore Disclosure
- 0.17 Reasonable Cause Statement
- 0.18 Quiet Disclosure
- 0.19 The Very Basics to Offshore/Foreign Reporting
- 0.20 Who Has to Report?
- 1 The Basics
The difference between making a Voluntary Offshore Disclosure and being caught underhanded by the U.S. Government in an IRS International/Offshore/Foreign Money Tax Audit can mean the difference between paying a relatively (comparable) small penalty vs. being subject to extremely high fines, penalties, levies, liens, seizures…and even prison.
I am So Scared I Can’t Sleep
Despite what you may have read online, not everybody with unreported foreign accounts, foreign income, foreign assets, foreign gifts, or foreign business ownership will be audited by the IRS. But for those who are audited before proactively making a disclosure, the penalties can be severe.
Unfortunately, due to the inherent “fear factor” of being audited by the IRS, coupled by the extremely high fines and penalties that a person may be subject to if they are caught with undisclosed foreign money – many Attorneys, CPAs and Accountants are using this information to scare unsuspecting taxpayers.
While not every body will be subject to an IRS audit, it is much better to be in compliance with the IRS by making a voluntary disclosure (through one of the approved methods) than to get caught in an audit situation.
We never recommend making a Quiet Disclosure. Why? Because making an intentional Quiet Disclosure can put you on the short path to Prison.
Voluntary Disclosure Before Audit – Penalty Reduction
When a person makes a voluntary disclosure, they are taking the proactive step to update the Internal Revenue Service and US government as to foreign money, gifts, accounts, assets, and business ownership that should have been reported previously. At Golding & Golding, we limit our entire practice to voluntary disclosure; we have pretty much seen and heard every excuse in the book.
Some excuses are good… and some excuses are not certain (read: my dog ate my FBAR). Nevertheless, the Internal Revenue Service has a program designed for both individuals and estates who had no idea they were supposed to report foreign money. Moreover, the IRS has a program in place for individuals, estates and businesses that knew they were supposed to report foreign money, but for one reason or another, never reported it.
Non-Willful Voluntary Disclosure
If a person was non-willful, they may be able to skate by with a relatively small penalty, if not a penalty waiver altogether. If you want to read a comprehensive article regarding the Streamlined Program or Reasonable Cause Statement submissions, please click the prior links.
Briefly, if a person was non-willful (and have unreported income) they typically have three (3) options to choose
Streamlined Domestic Offshore Disclosure
This program is designed for non-willful individuals who are based in the United States; in other words, they do not qualify as a foreign resident under the strict requirements of the streamlined program (the term “domestic” refers to the residence of the applicant and not the location of the accounts).
With a Streamlined Domestic application, a person will generally look back six (6) years, calculate the total amount of unreported funds for each of those years as valued on 12.31 of each year in the compliance period (Accounts closed prior to 12.31 are not included, in order to avoid double-counting or artificially inflated balances), select the year that has the highest balance and multiply it by 5%. The applicant will pay the 5% penalty in addition to any taxes and interest that should have been paid during each of the three prior years – and for the most part the applicant will be in compliance.
Streamlined Foreign Offshore Disclosure
If you qualify as a Foreign Resident under the streamlined program, you may qualify the Streamlined Foreign Offshore Disclosure Program. The requirements are much the same as the domestic program, except that the 5% penalty is waived. The applicant will still have to pay any outstanding taxes and interest for the three (3) prior years, but there is no penalty for unreported money. In addition, even if the applicant has not filed timely tax returns in the three prior years, he or she may still submit to the program.
Reasonable Cause Statement (In Lieu of Penalty)
This is not limited to international tax, but is applicable just the same. If a person believes that the penalty under the streamlined domestic program is simply too high or they do not qualify for the Streamlined Domestic Offshore Disclosure Program (a Domestic Resident who did not file tax returns in the prior three years) they can submit a Reasonable Cause Statement and request a penalty waiver submitting under reasonable cause instead of the Streamlined Domestic (there would be no reason to use reasonable cause in lieu of the Streamlined Foreign, because streamlined foreign has no penalty and you can submit even if you did not file ta returns in the three (3) prior years).
Unlike the Streamlined Program, with a Reasonable Cause Statement the applicant submits a statement explaining the facts and circumstances surrounding the failure to report the money – but then requests a penalty waiver. The risk is that the IRS may accept the statement and waive penalties, or the IRS may not accept the statement and issue penalties that are far greater than the penalties that would have been issued under the Streamlined Program; in other words, there is a risk.
Willful Voluntary Disclosure
If you are willful, then you do not qualify for any of the three (3) options listed above. Rather, you would have to submit under the traditional Offshore Voluntary Disclosure Program (OVDP). In all reality, while the penalty is much higher for OVDP than it would be under the Streamlined Program, you receive more benefits than you do under the Streamlined Program. First, you get criminal “protection” (which you do not get with the streamlined program, but which you would not need in the streamlined program since you were non-willful).
Although the IRS does not guarantee immunity from prosecution, even the IRS has stated that as long as you provide a full disclosure, the IRS will have no intention of prosecuting. Second, you also get audit protection. That is great, because once you sign the closing letter you can breathe easy knowing the IRS will not come back to audit you on these issues. Third, you get closure. You don’t necessarily receive a closing letter under the streamlined program and even when you do, it is just a letter summarizing the payment you made, and the payment they received – but it is not the same as a closing letter.
What does OVDP Closure Cost?
It can cost a lot. Assuming you do not opt-out (in which you decline the penalty and open yourself up for an audit), there are two penalty structures as of 2016. You will either be penalized 27.5% on the year within the last eight (8) years (compliance period) that has the highest maximum balance during the year (not just the 12.31 date) of unreported funds. Moreover, if any of that money is located in what the IRS has deemed a Bad Bank, the penalty for all of the money is increased to 50%.
In addition, you have to pay any outstanding tax liability for the last eight (8) years, along with a 20% penalty on the unpaid tax – in addition to any interest that is due. There are also some potential other penalties, but it is important to keep in mind that if you were willful, these penalties are significantly lower than the penalties you would get hit with an audit, in which the IRS determined that you were willful.
Being Proactive vs. Defensive
It is always better to put a fire out when it is small, as opposed to burying your head in the sand and letting it turn into a blazing inferno. In other words, you’ll be in a much better position if you simply make a voluntary disclosure to the Internal Revenue Service as opposed to letting them find you, being on the defensive, and having the IRS, DOT or DOJ make their own assumptions about the facts and circumstances of your case.
If you are non-willful, then by making the voluntary disclosure, you are taking charge of your situation and letting the IRS know what the facts are surrounding your noncompliance. Whenever a person, estate, or business makes a Voluntary Disclosure, we recommend that you use an attorney. Why? So that you do not have to answer any specific questions directly to the Internal Revenue Service, as well as maintaining a level of confidentiality with your tax representative that you do not receive with non-attorney.
Conversely, if you were willful, than by submitting to the Offshore Voluntary Disclosure Program you are limiting fines and penalties that the IRS can issue against you. Moreover, you are highly reducing any chance of being criminally investigated and placed in prison.
What are the Penalties for Unreported Foreign Money
The following is not exhaustive; it is a list of some of the more common penalties that are issued against individuals, estates, and businesses for failing to report foreign money.
As provided by the IRS:
Depending on a taxpayer’s particular facts and circumstances, the following penalties could apply:
– 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 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.
Want to Learn More about Offshore Disclosure?
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.
It is very important to ensure that if you are required to file a U.S. tax return, that you do so timely, and on an annual basis. The failure to file a tax return or pay outstanding tax liabilities may result in devastatingly high penalties – ranging from a warning letter all the way up to tax liens, tax levies, seizures, and criminal investigations.
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.
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’ve 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 on reported money. While that is 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 are knowingly or willfully kept your foreign accounts, foreign money, and offshore assets hidden 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.
We are going to provide a brief summary of each program below. We have also include links to the specific programs. If you are interest, we have also prepared very popular “FAQs from the Trenches” for FBAR, OVDP and Streamlined Disclosure reporting. Unlikes 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 have developed 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.
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 an 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).
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 example: if the taxpayer owed $20,000 in taxes over the last eight years then they would also have to include in check the amount of $4,000 the cover the 20% penalty on the $20,000 in outstanding taxes, as well as estimated interest.
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!
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 before it is too late!
What am I supposed to Report?
There are three (3) main aspects to dealing with foreign money. The first aspect is reporting your foreign account(s) the second aspect is reporting certain specified assets, and the third aspect is reporting your 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.
Whether or not you have the file in 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 8938 are the two most common forms, please keep in mind that there are many 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 a 3520.
- If you are the Owner of a foreign trust you will also have to file a 3520-A.
- If you have certain Ownerships of a foreign corporation you have to file a 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 and 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 in Japan and paid 25% tax in Japan, you would receive a $25,000 tax credit against your foreign earnings. Thus, if your US tax liability would be 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 would 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.
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.
*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.
When a Person, Estate or Business is out-of-tax compliance for failing to report Foreign Income, Foreign Income and/or Foreign Assets, the applicant has relatively few options for timely and safely getting into tax and foreign reporting compliance — before fines and penalties are issued.
While the most common options include the Offshore Voluntary Disclosure Program or the Streamlined Offshore Disclosure Program, there is another alternative.
It is called making a Reasonable Cause submission.
Reasonable Cause – Process
An individual should never attempt offshore disclosure without the assistance of a qualified attorney. With that said, it is even more important to ensure that if you are even considering a reasonable cause submission, that you do so only with the help of an attorney. That is because only with an attorney do you receive the benefit of the attorney-client privilege.
Unlike the Streamlined Program or OVDP where there are strict procedures to be followed, a reasonable cause submission is different. It should be noted that a person can submit a reasonable cause application for any number of different reasons; it is not limited only to offshore money and reporting foreign accounts.
With a reasonable cause submission, the attorney will carefully evaluate and analyze the facts and circumstances of your case in detail. He or she should sit down with you either person or via teleconference if you are non-local and assess the pros and cons of the potential submission in order to determine what the benefits and detriments may be to a reasonable cause disclosure. Thereafter the attorney will amend the returns, prepare the necessary forms, and draft a persuasive Reasonable Cause Letter.
At Golding & Golding, we are Tax Attorneys (with Masters of Tax Law) and Enrolled Agents credentialed by the IRS (Highest Credential awarded by the IRS), so we handle your entire submission (Taxes, Legal, and Audit Defense) in-house, for a flat-fee.
Reasonable Cause – Potential Examples
If you were completely non-willful in your failure to disclosure, and were unaware that there was any reporting requirement, then the thought of paying any penalty may sound absurd. Here are three (3) common examples in which paying any penalty for your undisclosed foreign accounts may seem unfair
Example 1: Michael travels worldwide and has accounts in numerous different countries. He only uses the foreign money when he is in the foreign country at issue, and there is usually a relatively small amounts of money in each account. At one point Michael thought about purchasing a home overseas and left the money in the Foreign account for a significant period of time (including 12/31). Foreign Taxes were fully paid on the money deposited into the account and foreign taxes were paid on the income the account generated. The only issue is that he did not report the account and/or the foreign income on his U.S. Tax Return.
Example 2: Michelle moved to the United States over 15 years ago but has a Foreign pension from a private employer. The pension is worth upwards of $1 million. Michelle has not accessed the account, nor has she contributed (or anyone else contributed) since arriving in the United States. Since the account/earnings are not taxed in the US until distributed, and there have been no distributions, Michelle never reported the account on an FBAR or 8938.
Example 3: David has a foreign account, which he received as an inheritance. He never touched the money, and even though the account earns minimal annual income, there is no tax for passive income in this particular country
Reasonable Cause – Viable Option
As you can see from the aforementioned examples, none of these individuals had any intent whatsoever to perform tax evasion. Moreover, the amount of income earned is relatively minor compared to the outstanding amount in the foreign accounts. In addition, in the case of Michelle, the majority of her money is it a pension account which is not even taxed by the US. Thus, even under the streamlined program she would be paying $50,000 in penalties for an account in which all of the money was earned and reported timely in her foreign country and all foreign taxes were paid on the contributions.
Quiet Disclosure (otherwise known as “Silent Disclosure” or “Soft Disclosure”) of your foreign accounts and foreign income on an FBAR or late/amended tax return is a serious violation of U.S. Tax Law, which can subject you to very high fines, penalties and criminal investigation.
A Quiet Disclosure will only Make Matters Worse
In a quiet disclosure, the person does not enter the program but rather simply amends their tax returns to include the unreported foreign income (schedule B), report the foreign accounts (8938 forms) and file FBAR Statements with the Department of the Treasury.
Here’s the problem: If you were originally non-willful (in that you were unaware of the requirement to file an FBAR) but now you went ahead and willfully failed to pay the penalty, you may have bootstrapped your non-willful submission into full-blown tax fraud and tax evasion.
Why? Because you have now willfully evaded US tax, interest and penalties by knowingly filing an untimely FBAR or Amended Tax Return without payment penalty for money you know you earned in the past but had not paid any US tax on.
Click Here to read our article/case study: “Quiet Disclosure Case Study Example – From Submission to IRS Audit…to Jail“
The Very Basics to Offshore/Foreign Reporting
Golding & Golding is a flat-fee, full-service firm; we are lawyers who assist international clients in reporting their offshore accounts to the IRS. Most recently, many of our clients learned about Foreign Bank Account reporting requirements when they received a FATCA Letter from their Bank, asking them to certify their U.S. Status by submitting either a W-9 or W-8 BEN.
Who Has to Report?
We have represented numerous clients worldwide with issues similar to yours:
– Expats who relocated overseas and did not know they had to report their foreign accounts.
– U.S. Citizens who live overseas and may or may not earn significant income, but have accounts in a foreign country.
– Legal Permanent Residents of the United States who relocate back to a foreign country but are unaware that they are still required to report the foreign accounts.
– Non-Residents who meet the substantial presence test and therefore are required to report foreign bank and other accounts to the US government.
Please do not worry. We can assist you as we have assisted hundreds of clients in over 40 countries disclose upwards of $40 million in a single disclosure.
We are available seven days a week and provide flat-fee and full-service representation to our clients around the world.
These are the most basic rules when it comes to foreign accounts and foreign income:
If you are either a US Citizen, Legal Permanent Resident (aka Green Card holder or recently gave up your Green Card) or foreign resident who meets the substantial presence test, then you are required to report your worldwide income to the IRS. This means that even if you do not have any US-based income, you are still required to report your worldwide income (even if it is the type of income which is not taxed in your home country such as interest and dividend income in most Asian countries). And, if you have enough foreign income to meet the minimum threshold for having to file a US tax return, then you are required to do so even if it is based on your foreign income alone.
If you meet the requirement for being a U.S. “Taxpayer” (even if you do not meet the threshold for having to file a US tax return), you are still required to file an annual FBAR (Report of Foreign Bank and Financial Accounts). The threshold is as follows: if at any time during the year, you have more than $10,000 in foreign accounts (whether the money is in one account or spread over numerous accounts), you are required to file an FBAR.
In addition, if you have significant amounts of money overseas, then you may also have to file additional forms such as an 8938 (FATCA Form) or 8621 (Passive Foreign Investment Company, which includes Foreign Mutual Funds along with as many other passive investments). There are many other forms you may have to file, but we determine those on a case-by-case basis.
Fines & Penalties
Unless you are criminal, chances are the IRS or Department of Justice will not be banging down your door to come drag you to jail. With that said, the fines and penalties can be very steep and depending on your particular circumstances, may include penalties upwards of 100% of the value of your foreign account. If the IRS believes you were willful (aka intentional), then they may launch a criminal investigation against you and the penalties and fines can get much worse from here, including Liens, Levies, Seizures…and worse.
Customs Holds and Passport Revocation
With the implementation of FATCA (Foreign Account Tax Compliance Act), the United States is heavily cracking down on offshore tax evasion and unreported foreign accounts in general. The IRS and US government have the power to both revoke your passport as well as possibly hold you at the airport “customs hold” to question you on the spot (usually outside the presence of your attorney).
Getting Into Compliance
Getting into compliance should be mandatory on your “to-do” list. Even though our firm, Golding & Golding, is based in Newport Beach, we represent clients worldwide. A majority of our clients live overseas in over 40 countries. We have helped numerous clients get into compliance and are regarded as one of the top Offshore Disclosure Law Firms worldwide.
To that end, there are three main methods of compliance:
(1) Streamlined Compliance
This program is for individuals who were unaware of any requirement to file an FBAR and/or report their income on a US tax return. The penalties under the streamlined program are significantly reduced and may possibly be waived depending on whether a person qualifies under the strict definition of foreign resident for offshore disclosure purposes.
This program is mainly for individuals and businesses who were willful, aka were aware they were supposed to report their foreign accounts but intentionally hid or kept the account/income information secret.
(3) Reasonable Cause Statement
This is not a particular program; instead, it is a method for getting to compliance while attempting to avoid any penalty. There are many pros and cons to this method depending on your specific situation, which must be evaluated carefully with your attorney before making a decision.
We provide a reduced fee telephone consultation to all potential clients (excluding CPAs, Lawyers, and/or other Tax Professionals) so that we can answer your questions. All calls are strictly confidential and the information is covered under the attorney-client privilege (even if you decide not to retain our firm).
Call now; let us help you.
Sean holds a Master's in Tax Law from one of the top Tax LL.M. programs in the country at the University of Denver, and has also earned the prestigious Enrolled Agent credential. Mr. Golding is also a Board Certified Tax Law Specialist Attorney (A designation earned by Less than 1% of Attorneys nationwide.)