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OVDP Opt-Out may Lead to Higher FBAR Penalties & Fraud Penalties – FBAR Lawyers

Golding & Golding - International Business Tax Lawyers

Golding & Golding – U.S. and International Tax Lawyers

When people enter OVDP (Offshore Voluntary Disclosure Program), the idea is that they will most likely avoid criminal prosecution, as well as significantly reduce their offshore disclosure penalty.

Depending on whether the majority of the outstanding undisclosed information is income, or whether the undisclosed money is in foreign account balances will severely impact the potential penalties.

Why? Because the worst penalties of all are based on the account balances (FBAR Penalties), not the unreported income. Therefore, if you happen to have a large amount of unreported foreign income and small account balances you generally are able to avoid the largest penalty  (FBAR Penalty) that accompanies someone who has a large outstanding balance and relatively small income.

To combat the disparity in the penalty assessments, the IRS allows individuals to Opt-Out of the penalty structure. The problem is – and what many inexperienced OVDP attorneys fail to explain to their clients – are the numerous penalties they a person may become subject to as a result of “opting-out” of the OVDP Penalty Structure.

These penalties include:

– 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.

-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.

FBAR Reporting 

Since the failure to report and file the FBARs can lead to very significant and serious penalties,  below please find a summary of FBAR Laws as provided by Golding & Golding:

Golding & Golding

Our clients are located throughout California, as well as nationwide and around the world. We have represented clients with unreported accounts and assets exceeding $25,000,000 and with accounts and assets over 35 countries.

The United States takes FBAR reporting and compliance very seriously, and if not handled carefully a person may find themselves, their trust, or their business subject to significant taxes, fines, penalties, interest and possible criminal investigation.

                    

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 11 bank accounts with $1000 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:

  1. 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).
  1. 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.
  1. 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.
  1. 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.

Click Here for Golding & Golding’s Free FBAR FAQ Guide.