IRS Penalties for Un-Filed FBAR, Schedule B, Form 8938, 3520 & 5471
- 1 FATCA & FBAR Reporting Requirements
- 2 Penalty Reduction or Waiver – Streamlined Disclosure
- 3 Common Unreported Forms
- 4 IRS Offshore Voluntary Disclosure
- 5 When Do I Need to Use Voluntary Disclosure?
- 6 Golding & Golding – Offshore Disclosure
- 7 The Devil is in the Details…
- 8 What if You Never Report the Money?
- 9 Getting into Compliance
For many people with Foreign Accounts, Specified Foreign Assets, or Foreign Income, they are under the misunderstanding that they do not have to report this information to the IRS or U.S. government — and that they must only report the information in the country in where the account exists; this is incorrect.
Moreover, the failure to report and pay tax on foreign money can lead to very high fines and penalties by the IRS.
Oftentimes, a person will only learn about the U.S. Government Foreign Account and reporting requirement when they receive a FATCA Letter from their Foreign Financial Institution (FFI) or foreign bank, or some off-hand (and usually inaccurate) information.
FATCA & FBAR Reporting Requirements
Like anything in life, bad news never comes when you expect it — and FBAR and FATCA are no exception. We all know that feeling: you are out to dinner with friends or relatives and someone brings up a topic (in this case, Foreign Accounts) which you never thought about applying to you (aka You are originally from China, and all of your Accounts are in China…so how are they Foreign?)
The speaker continues on about something they heard (read: Mis-information) or what some aggressive salesman attorney told them (read: Scare Tactics)…and you sink further into your seat.
This leads to a frantic late-night Google search, followed by unnecessary panic and fear.
Penalty Reduction or Waiver – Streamlined Disclosure
Like most people, if you are non-willful (which essentially means you had no intent to defraud the US government by evading tax) you can qualify for the Streamlined Program (summarized below).
There are two variations of the Streamlined Program depending on whether a person resides in the United States or if they qualify as a foreign person. The Streamlined Domestic Procedures and Streamlined Foreign Procedures.
Streamlined Domestic Procedures
If a person resides in the United States, they are considered a domestic application and will have to pay 5% penalty on the highest December 31st annual aggregate total value of their unreported foreign accounts, for the highest year within the last six years.
Streamlined Foreign Procedures
Alternatively, if a person resides outside of the United States for at least 330 days in any one of the last three tax years (under a strict foreign person test) or does not meet the substantial presence test, the 5% penalty is waived.
Common Unreported Forms
The following is a brief list of the most common forms individuals with foreign accounts do not file timely:
DOT Form “FBAR” (FinCEN 114) – Generally, this form must be filed by any individual who has ownership or signature authority over foreign accounts that have an annual aggregate total of $10,000 at any time during the tax year.
IRS Form Schedule B: For Individuals with foreign accounts, this form can be a headache. That is because most people are under the impression that Schedule B only needs to be filed if annual Interest and/or Dividends exceeds $1,500 for the year. While this may be true for Taxpayers with Domestic Interest Income and Dividends, the threshold is different for Taxpayers with Foreign Accounts. If you have a Foreign Account (ownership or signature authority), you have to file this form – specifically, question 7, whether or not any Foreign Dividends or Interest Income was earned/distributed.
IRS Form 8938 – Generally, this form must be filed by any individual who has ownership over accounts that have an annual aggregate total of $50,000 on the last day of the year, or $75,000 at any time during the year. These numbers double when a person files married filing jointly.
– Moreover, if the person resides outside of the United States the threshold is further increased depending on whether the person is married, single, or filing married filing separately.
IRS Form 3520 – Generally, the form must be filed by any individual who has received a gift that exceeds more than $100,000 in any given year – whether it be one bequest or a series of transactions that exceed $100,000.
– There are additional reporting requirements for individuals who receive distributions from a Trust, or Gifts from a business/Corporation.
IRS Form 5471 – Generally, this form must be filed by individuals who fall into any certain number of categories of ownership of a foreign corporation. This is a complex form, which requires extensive analysis to determine whether a person qualifies and if they meet any exceptions.
IRS Form 8621 – This is one of the more complicated forms provided by the Internal Revenue Service and can take several hours to complete. This form is to be filed by individuals who have PFIC (Passive Foreign Investment Companies).
– What makes this form infinitely complicated is that there are various types of foreign investments that automatically qualify as a PFIC even though the investor had no intent of investing in a PFIC (such as investing in foreign mutual funds).
– Moreover, if they were any “excess distributions,” then there are various tax ramifications which are compounded by different elections which can be made to determine tax liability – which requires an exhausting analysis.
Your best bet is usually Offshore Voluntary Disclosure:
IRS Offshore Voluntary Disclosure
Offshore Voluntary Disclosure Tax law is very complex. 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.
When Do I Need to Use Voluntary Disclosure?
Voluntary Disclosure is for individuals, estates, and businesses who are out of compliance with the IRS and the Department of Treasury. What does that mean? It means that if you are required to file a U.S. tax return and you don’t do so timely, then you are out of compliance.
If the IRS discovers that you are out of compliance, you may become subject to extensive fines and penalties – ranging from a warning letter all the way up to tax liens, tax levies, seizures, and criminal investigations. To combat this, you can take the proactive approach and submit to Voluntary Disclosure.
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. Many of our clients have assets and bank accounts in their homeland countries and these are considered offshore assets and offshore bank accounts.
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 have 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 unreported money. While that is most likely 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 knowingly or willfully hid your foreign accounts, foreign money, and offshore assets 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 included links to the specific programs. If you are interested, 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 develop 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.
Call Now, We Can Help.
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.)
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