OVDP Lawyers | 8938 and FBARs – International Tax Lawyers
When it comes to OVDP (Offshore Voluntary Disclosure Program) and the IRS Streamlined Program, the two main forms that carry the highest penalties are the IRS 8938 and the FBAR.
The following is a summary of the difference between the two (2) Forms:
When do I File an FBAR?
If you, your family, your business, your foreign trust, and/or PFIC (Passive Foreign Investment Company) have more than $10,000 (in annual aggregate total at any time) overseas in foreign accounts and either have ownership or signatory authority over the account, it is important that you have an understanding of what you must do to maintain FBAR (Report of Foreign Bank and Financial Accounts) compliance. There are very strict FBAR filing guidelines and requirements in accordance with general IRS tax law, Department of Treasury (DOT) filing initiatives, and FATCA (Foreign Account Tax Compliance Act).
What Accounts are Reported on an FBAR?
Filing FBARs and ensuring compliance with IRS International Tax Laws, Rules, and Regulations is extremely important for anyone, or any business that maintains:
- 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 (including some Life Insurance)
- Foreign Accounts held in a CFC (Controlled Foreign Corporation); or
- Foreign Accounts held in a PFIC (Passive Foreign Investment Company)
Golding & Golding provides Foreign Account Reporting (FBAR) strategies for clients around the globe in order to report Foreign Bank Accounts and become FBAR compliant. We also defense clients who are under FBAR Audit by the IRS and DOT.
What is an FBAR?
In accordance with international tax law compliance, taxpayers who meet the threshold requirements are required to file an FBAR.
An FBAR is a “Report of Foreign Bank and Financial Accounts” form. It is a form that is filed online directly with the Department of Treasury. Unlike the tax return, the FBAR form must be filed by June 30th of the tax year and there are no extensions available for filing it late. If you attempt to file it late, there can be serious repercussions, including fines and penalties – since it is considered Quiet Disclosure or Silent Disclosure in an attempt to circumvent the OVDP or Streamlined Program rules and regulations and filing an untimely FBAR.
**UPDATE: Starting in 2016 for Tax Year 2015 – filing of your 2015 FBAR will be in accordance with the same time periods to file your tax returns, which is by April, 2016 unless you receive an extension of time to file.
FBAR filings can be overwhelming, especially if you have never filed one before. If this is the case, our experienced international FBAR Lawyers can assist you in ensuring you are compliant with IRS FBAR Law and FATCA requirements.
Who is Required to File an FBAR?
Not everyone who has foreign accounts is required to file an FBAR. Rather, it is required to be filed by all U.S. Taxpayers (whether they reside in the U.S. or overseas) with foreign accounts that have an “annual aggregate total” exceeding $10,000 at any time during the year. Thus, if a U.S. Taxpayer (including Legal Permanent Residents “aka Green Card Holders”) maintains foreign accounts, including banks accounts, financial accounts, or insurance policies that have a combined value of more than $10,000 (or has indirect ownership of the account or signature authority), then that person is required to file an FBAR statement.
What if None of My Accounts Exceed $10,000?
It does not matter. It is important to remember that the threshold is the Annual Aggregate Total value at any given time during the year. This means if you have 101 bank accounts with $100 each at any given time during the year, you are STILL required to file the FBAR and list all the accounts on it, even if none of the accounts exceed $10,000. In other words, you are required to report the total value of all your foreign accounts located in any foreign country on your FBAR once you exceed the $10,000 annual aggregate total threshold on any given day during the year.
There are various accounts and other assets (insurance policies) which may or may not be included in your FBAR analysis. Please contact one of our experienced FBAR Lawyers for further assistance regarding specific account disclosures.
What if I did Not File an FBAR Statement?
If a person fails to file the FBAR, there is still hope. Depending on whether the person also had unreported foreign income (income that was earned overseas and not reported on the U.S. tax return – even if it was reported in a foreign country and foreign tax was paid), the IRS and DOT will determine if a penalty will be issued; usually the taxpayer will be penalized but the amount of the penalty will vary.
What are the Penalties for Failing to File an FBAR?
Recently, the Internal Revenue Service issued a memorandum which details how the IRS “believes” the agents should penalize individuals in accordance with their authority. Essentially, there are two sets of penalty structures and they are based on whether the taxpayer was willful or non-willful.
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.
Why is it Important to File an FBAR?
Prior to the recent changes in the law, taxpayers were able to fly below the radar and could probably last most of their lifetime without having to file international tax forms disclosing their foreign income and overseas assets. The problem is that under the new FATCA (Foreign Account Tax Compliance Act) laws, foreign countries and the United States are entering into intergovernmental agreements (IGA) with foreign countries.
IGAs are “reciprocity agreements.” In other words, while foreign countries are going to report account information of US taxpayers (U.S. Citizens, Legal Permanent Residents, and Foreign Nationals Subject to U.S. Tax), the United States is going to do the same and report account information to the foreign countries. Thus, there is a benefit to both parties in entering these IGA Agreements.
FBAR compliance is very important for any taxpayer subject to IRS tax reporting requirements. The failure to file a timely FBAR and remain in IRS tax compliance can lead to significant fines, penalties, and other possible consequences.
What can I do to get FBAR Compliant?
There are various safe harbor programs in place, which if a person meets the requirements, then they can have their penalty reduced if not eliminated. The two main programs are the Offshore Voluntary Disclosure Program (OVDP) and Modified Streamlined Program. These safe-harbor programs can be eliminated by the IRS at anytime.
We have gone into great detail on our website explaining the difference between the Offshore Voluntary Disclosure Program (OVDP) and Modified Streamlined Program. Essentially, Offshore Voluntary Disclosure Program (OVDP) is a program intended for those who were willful. In other words, if you knowingly defrauded the IRS by not reporting your foreign assets and you “knew” you were supposed to report the information, then the OVDP is the proper program for you.
In this program, the penalty is relatively high compared to the other program, but you walk away with the satisfaction of knowing you only have to pay a financial penalty and you will probably not end up in prison doing a 20-year prison stint with real criminals.
Alternatively, if your only mistake was that you were unaware of the requirement to file FBAR statements, then you can enter the Modified Streamlined Program. Unlike OVDP, the Modified Streamlined Program does not provide you criminal protection but if you are non-willful then you do not require criminal protection. Under the streamlined program, the penalty structure is reduced significantly and the filing requirements are much more limited.
Nevertheless, it is absolutely crucial that you do not enter the streamlined program or file FBAR Reasonable Cause Statements if you were willful – because if you are detected by the IRS and they find that you were clearly willful but you were just simply trying to get a penalty reduction, then the IRS will see this as tax fraud and tax evasion and they will prosecute to the fullest extent of the law.
**In addition, the current reduced penalty rate will often increase with each new year, and most importantly, if you find yourself under audit, then you are disqualified from entering these programs.
8938 (Statement of Foreign Accounts)
Whether or not the taxpayer has to file the form will depend on the amount of money they have overseas as well as the marital status.
U.S. Taxpayers – Single or Married Filing Separate
If a taxpayer is single or files married filing separate then they will have to file IRS form 8938 they have more than $50,000 in aggregate total in the overseas accounts on the last day of the year. Alternatively, if they have less than $50,000 on the last day of the year but at any time during the year they had $75,000 or more in overseas accounts then they are also required to file IRS form 8938.
U.S. Taxpayers – Married Filing Jointly
When taxpayers file married filing jointly, the threshold requirements are doubled. In other words, when a couple files the US tax return as married filing jointly, they will only have to file IRS form 8938 when you have a combined annual aggregate total of $100,000 on the last day of the year or if it anytime during the year they had $150,000 or more in overseas accounts.
If a person does not meet these threshold requirements, then generally they will not have to file IRS form 8938.
*Taxpayers should be sure they understand that even if they are not required to file IRS form 8938, they may still be required to file an FBAR with the Department of the Treasury, since the threshold requirements for overseas accounts and FBARs are significantly less ($10,000).
**Unlike the FBAR, a person only has to file an IRS form 8938 when the money is theirs; with an FBAR, a person has to file the FBAR even if the money is not theirs, but they have signatory authority over the accounts.
***The threshold requirements for U.S. Citizens and Legal Permanent Residents residing overseas is higher.
IRS Form 8938 Penalties
If you are required to file Form 8938 but do not file a complete and correct Form 8938 by the due date (including extensions), you may be subject to a penalty of $10,000 per year.
- Continuing failure to file: If you do not file a correct and complete Form 8938 within 90 days after the IRS mails you a notice of the failure to file, you may be subject to an additional penalty of $10,000 for each 30-day period (or part of a period) during which you continue to fail to file Form 8938 after the 90-day period has expired. The maximum additional penalty for a continuing failure to file Form 8938 is $50,000.
If you have failed to file these forms, you generally have 3 options available to you to try to get compliant:
Reasonable Cause Statements
When it comes to the reasonable cause statement, the IRS does not want to back itself into a corner. Therefore, the Internal Revenue Service does not provide samples of reasonable cause statements (or really any guidance) as to what is considered reasonable cause – beyond the fact that reasonable cause is determined on a case-by-case basis.
By submitting a reasonable cause statement you are essentially asking the Internal Revenue Service to understand that the reason why you failed to file either the 8938 or FBAR was because you were unaware of the requirement to do so and this failure to do so was reasonable or “a normal mistake.” What the Internal Revenue Service does not tell you is about all the pitfalls and inherent risks that are also included in failing to file a reasonable cause statement:
OVDP and IRS Streamlined Programs
Individuals and businesses who are looking for a way to avoid the very steep penalties 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, 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.
*Please note, the IRS is not known to be sympathetic and if the IRS does not believe you and audits you anyway then you are disqualified from entering either the OVDP or streamlined program AND the IRS is have more of your overseas/foreign financial information you would like probably like.
Moreover, if the taxpayer improperly submits the forms to the IRS it can be considered “silent disclosure” or “quiet disclosure,” in which if detected by the IRS, the IRS will penalize you heavily as well as probably initiate criminal proceedings against you. In this scenario, not only with the IRS seek to take all of your money and assets through the implementation of penalties and levies, but chances are you will also be spending the next 2 to 20 years in prison for tax evasion or tax fraud.
OVDP vs. 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)
OVDP stands for the Offshore Voluntary Disclosure Program, which came into effect in 2009 and was modified again in 2011, 2012 and 2014.
Before the implementation of the modified streamlined program (which is strictly for individuals who were non-willful in their failure to report their overseas assets and income) the penalty structure was generally (and continues to be for willfulparticipants) 27.5% of the highest years annual aggregate total and 50% if any of your money was held in one of the identified “bad banks.”
In other words, if you have foreign accounts that were unreported to the IRS and Department of Treasury, then to determine your penalty structure you would need to total up all of your unreported overseas and accounts for each year, for the last eight years, and then take the highest year’s highest balance and multiply it by 27.5% to arrive at the penalty amount due. (A complete breakdown of OVDP requirements can be found on our OVDP Page, by Clicking Here)
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, no penalty on the value of foreign real estate that was not previously disclosed, and the 27.5% penalty was reduced all the way 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 in any number of different countries 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.
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.