Streamlined Domestic Offshore Procedures (2019) – 5% Penalty Example
Streamlined Domestic Offshore Procedures: If you have unreported Foreign Accounts, Income, Investments or Assets and want to get into IRS compliance, the Streamlined Domestic Offshore Procedures (SDOP) may be a good option for you.
Typically, you have to meet the following threshold requirements:
- Not Qualify as a Foreign Resident
- Filed Timely Tax Returns
*In order to make sure your confidentiality is protected, be sure to confirm that the person actually representing you is a licensed attorney, so that you ensure all your communications with the Attorney are protected under the Attorney-Client Privilege.
Trust Your Submission to a Board Certified Tax Law Specialist
Sean M. Golding, JD, LL.M., EA (Board Certified Tax Law Specialist)
IRS Offshore Disclosure is ALL we do.
Our Managing Partner, Sean M. Golding, JD, LLM, EA earned an LL.M. (Master’s in Tax Law) from the University of Denver and is also an Enrolled Agent (the highest credential awarded by the IRS, and authorizes him to represent clients nationwide.)
Mr. Golding and his team have successfully handled several hundred IRS Offshore/Voluntary Disclosure Procedure cases. Whether it is a simple or complex case, safely getting clients into compliance is our passion, and we take it very seriously.
He is frequently called upon to lecture and write on issues involving IRS Voluntary Disclosure.
Less than 1% of Attorneys nationwide are Board Certified Tax Law Specialists.
Who Decides to Go Streamlined?
All different types of people submit to the Streamlined Domestic Offshore Procedures. We represent Attorneys, CPAs, Doctors, Investors, Engineers, Business Owners, Entrepreneurs, Professors, Athletes, Actors, Entry-Level staff, Students, and more.
You are not alone.
Streamlined Domestic Offshore Procedures
SDOP is an IRS program designed for individuals who were non-willful and meet the other filing requirements. And, as the IRS continues to increase enforcement of offshore tax related issues (as well as issuing fines and penalties against individuals out of compliance) the number of people entering the program continues to grow.
Streamlined Domestic Offshore Procedures Summary
The Streamlined Program requires the applicant to amend and pay outstanding tax liability for the last three (3) years to include unreported foreign income and unreported foreign accounts that were not previously reported on a U.S Tax Return. It also requires the applicant to file six (6) years of FBARs (FinCEN 114) and pay a (relatively) small penalty which equals 5% of the highest year end value for any given year, unless you qualify as a foreign resident for 330-days, in which you can receive a penalty waiver!
- Amend the last 3 years of Tax Returns
- File required forms such as 3520, 3520-A, 5471, 8621, 8865, 8938, etc.
- File 6 Years of FBAR (FinCEN 114) – Report of Foreign Bank and Financial Accounts
- Take a “snapshot” of the aggregate offshore unreported balances on 12/31
- Pick the highest year’s 12/31 annual aggregate value
- Multiply the value by 5%
- Pay the outstanding Tax, Interest on Taxes due, along with the 5% percent penalty
Streamlined Domestic Offshore Penalty – 5% Calculation
One of the most common questions we receive daily is regarding penalties – specifically, how is the Streamlined Domestic Offshore Procedures Penalty calculated?
Here is a Brief Summary (But please keep in mind that you should consult with an experienced Offshore Disclosure Attorney when making proactive representations to the IRS, and there is no attorney-client privilege with a CPA).
1st: Compile the 12/31 balances on your Foreign Accounts, Insurance Policies and other 8938/FBAR qualified accounts for each year within the compliance period.
2nd: Determine the proper exchange rate for each year (For example: You cannot use the current exchange rate in 2017, for your 2013 accounts — sorry for those of you with accounts in Euros or Rupees).
3rd: Total the 12/31 balances on your previously unreported Foreign Accounts, Insurance Policies and other 8938/FBAR qualified accounts (Value of Real Estate is not included for the Streamlined Program).
4th: Pick the Year that has the highest 12/31 balance (not highest max year balance, which is the standard for OVDP).
5th: Multiply the above-value by 5%.
Example: Michael’s highest year 12/31 aggregate balance in the six (6) year compliance period is 2013. In 2013 his 12/31 balances totaled $2,600,000. His penalty would be $130,000.
In order to be non-willful, the individual must show that they…weren’t willful – yes, that’s pretty much the extent of the definition provided by the IRS. In other words, the IRS likes to try to place the burden on you, the individual, to prove that you are non-willful.
In fact, the IRS has gone to great lengths to keep the specific analysis it uses to determine that somebody was willful under lock and key — going so far as fighting it in court. In our experience, we have found that typically, common sense rules dictate.
For example, if you literally had no idea that foreign accounts needed to be reported, and your actions, behavior, and history shows that you did not access the foreign accounts, withdraw any money from them, etc., then chances are you will be able to show you were non-willful.
The further you sail away from those shores, the murkier the water becomes, and with it is an increased risk that the IRS may dispute your claim that you are non-willful.
The following are common questions to consider regarding willful vs. non-willful
- What is your U.S. status?
- How long have you been in the United States for?
- How many years have you filed U.S. tax returns?
- What types of investments do you have overseas?
- Do you utilize a financial planner?
- Do you have a CPA or EA?
- Is your CPA or EA experienced in international tax?
- Did your CPA or EA send you questions in writing asking about Foreign Accounts or Income?
- Did you respond truthful to the CPA or EA?
- Did you complete a schedule B?
- Are you tax compliant in the country in which the accounts are maintained?
- Did you have unreported income as well?
These are just some of the many questions you should consider prior to determining whether you were non-willful.
Common Streamlined Questions & Answers
What if I was Willful?
*If you were willful, then you should never submit to the Streamlined Program. Unfortunately, there has been an influx of inexperienced attorneys who will prey upon you, and convince you to go streamlined instead of OVDP. They will make it seem that if you only have a small amount of income, or were only noncompliant for a few years, that you can still go streamlined.
This is both improper and unethical, and if you come across an attorney trying to sell you on this false bill of goods, you should contact his or her local state bar association. Click Here for a Case Study Example of what happens when the IRS catches you.
Filed Original Returns Timely
In order to qualify for the Streamlined Domestic Offshore Procedures, you must show that you filed your original returns timely. There is some wiggle room regarding the terminology “timely,” and if you filed your returns, but they were filed late — you should consider having a tax attorney contact the streamlined program directly to assess whether you may qualify despite having filed late original returns.
I Knew I Should have Filed Tax Returns, but Did not Know About FATCA or FBAR?
The IRS is not one for mincing words or arguing semantics. In other words, if you knew you were supposed to file a tax return (or “do something”) to meet the obligation of reporting your foreign accounts and/or foreign income, then the mere fact that you were not fully informed of every measure you needed to take in order to get into compliance…is probably a situation in which the IRS would find you willful.
In these types of circumstances, it is important to speak with an experienced offshore disclosure lawyer – but keep in mind that the fact that you knew you had a reporting requirement and/or tax filing requirement but intentionally failed to meet that requirement is probably sufficient to place you in the willful category (under IRS standards).
What if the IRS disagrees with Me and Believes I was Willful?
If the IRS disagrees with your representation of the facts, then they will reject your Streamlined Application, and either Audit you and/or refer the case to the IRS Special Agents for Criminal Investigation.
Without sounding like a salesperson, this is why you retain an experienced international tax lawyer to represent you throughout the application process. Yes, CPAs, Enrolled Agents and general practitioners will try to sell you that they can do it for “cheaper” and that you are “low-risk”, but once the IRS starts auditing individuals who are in the program, you will be a much better position (mentally and physically) to know you are being represented by an experienced International Tax Attorney (covered by the attorney-client privilege).
Is there an Attorney-Client Privilege with a Non-Attorney?
No, there is not. If you are being represented by a non-attorney, then there is simply no attorney client privilege. There is a very limited privilege with a CPA or Enrolled Agent, but if it turns out the IRS believes you were willful and wants to pursue a criminal investigation against you, the CPA or enrolled agent can be forced to submit to an examination by the IRS (unless the CPA or Enrolled Agent is also an attorney). Please Click Here for an Article on Attorney-Client privilege.
In other words, the information you tell your CPA may be subject to discovery by the IRS.
My CPA told me there is a Privilege?
There is a limited privilege you maintain with a CPA, but it does not cover more extensive criminal and quasi criminal investigations. In this type of situation (Streamlined Disclosure), in which the IRS does not provide concrete guidelines regarding willful versus non-willful, it is important to understand that the IRS could follow-up with you and/or your representative.
While you may believe the facts and circumstances of your situation are clearly non-willful, the IRS may disagree. To that end, this is not the type of matter in which you want your CPA or other non-attorney tax representative to be subject to having to disclose information you believed you told the representative in confidentiality.
Which Three (3) Years of Tax Returns do I have to Amend?
Generally, it has to be the last three years of tax returns that were filed. So for example, in November of 2016 you decide you want to enter the program, you would amend your tax returns for tax year 2015, tax year 2014, tax year 2013. Please Click Here to Learn More about Amending Tax Returns under the Streamlined Program.
Is it True I can still be Audited for the Prior 3 years of Tax Returns?
Whether or not you enter the Streamlined Program (which requires you to amend the most recent 3 years of tax returns), if you have more than $5000 of unreported foreign income, the IRS can expand the Statute of Limitations to audit you from 3 years to 6 years.
For example, if you enter the Streamlined Program in 2016, and amended 2013, 2014, and 2015, the IRS could still audit you for the three prior years (2010-2012) – but that is true whether or not you enter the streamlined program, and by entering the Streamlined Program you may reduce the chances of having those years audited. Please Click Here for an Article regarding the Streamlined Program and the 6-year foreign income audit.
On my Original Schedule B I Indicated I had no Foreign Accounts?
This is where many people start to “ride the line” between willful and non-willful. The fact of the matter is, there are many reasons that we have come across in our practice as to why a non-willful person would indicate they did not have foreign accounts on the Schedule B when in fact they did have foreign account – and would still be considered non-willful. Thus, if the only reason you believe you were willful is because of how you or your CPA/Accountant responded on schedule B, it may be in your best interest to contact an experienced streamlined disclosure lawyer to discuss the possibilities of qualifying for the Streamlined Program
So if I marked No on Schedule B, I may still Qualify for Streamlined?
Yes. For more information, you can click here to read what the IRS has to say about Schedule B and Non-Willful (See IRS FAQ 13).
I received a FATCA Letter, now what?
When you receive a FATCA Letter (Foreign Account Tax Compliance Act), it is important to realize that the clock has already started ticking. It means that the foreign financial institution/foreign bank is probably going to report your information to the United States, and when the IRS learns that you have outstanding foreign accounts that have not been reported on your tax return, it could lead to an audit or examination which may prevent your ability to enter the program.
What if I Do Not Respond to the FATCA Letter?
If you do not respond to the FATCA Letter, chances are the Foreign Bank will submit your information to the IRS, which in turn may lead to an IRS Audit or Examination — and make you ineligible for the Streamlined Disclosure Program. Click Here to learn about not responding to a FATCA Letter.
What if I have an Unreported Foreign Gift (Form 3520)?
If you failed to report a gift from a foreign person, foreign business or trust distribution, it may be subject to a penalty unless you properly disclose it in accordance with amending your tax returns under OVDP. For more information about Foreign Gifts, please Click Here.
What if I Failed to Report a Foreign Trust (Form 3520-A)?
The U.S. Tax Code is stacked against Foreign Trusts. In other words, the failure to properly report your foreign trust on a form 3520-A can lead to significant fines and penalties (as the U.S. Government may see it as your attempt to shelter money offshore in a Foreign Trust). To learn more about Foreign Trust Reporting, Please Click Here.
What if I Never Reported my Foreign Business Interest (Form 5471)
In order to avoid the problem of U.S. Taxpayers sheltering money offshore in a foreign business (and not reporting the earnings), the IRS takes a hardline against individuals with unreported Foreign Business Interest. For individuals required to file form 5471, the failure to filing the form can lead to penalties upwards of $50,000+ and the returns are due annually. To learn more about reporting your Interest in a Foreign Business, please Click Here.
I have a PFIC and/or Foreign Mutual Fund that I never Reported (Form 8621)?
The IRS reserves the most complicated and complex tax computation for the infamous “PFIC aka Passive Foreign Investment Company.” Moreover, the IRS has essentially deemed that all Foreign Mutual Funds fall under the PFIC umbrella. Therefore, that Foreign Mutual Fund you purchased offshore that is accruing and/or distributing Interest or Dividends may be subject to a monster tax analysis — especially if it qualifies as issuing an “Excess Distribution.” For a comprehensive analysis of PFIC 8621 reporting, please Click Here.
I Cannot Locate All of my Account Information
If you are unable to find all of your account information, the most important information to obtain is the year-end balances. That is because it is the year-end balances that are utilized by the IRS to determine what your penalty will be (unless you qualify for a penalty abatement). Thus, while many foreign countries do not hold account information for more than three years and/or charge ridiculous fees for you to obtain the information — you can usually obtain the year-end information.
I do not Have to Pay Tax on These Accounts Overseas?
Welcome to the United States. If you are entering the streamlined program it is because you learned you are required to file your taxes as if you were a US citizen and the IRS taxes you on your Worldwide Income.
Thus, as a US citizen, Legal Permanent Resident, or Foreign National otherwise subject to US income tax on a 1040 you are required to file a US tax return and report all of your foreign earnings. Just because you are not taxed on passive income in the country in which the accounts were held does not mean the income is tax-free in the United States.
In fact, foreign income (paid or accrued) is usually taxable under IRS Tax Law — but if you have already paid foreign tax you may qualify for the foreign tax credit. Click Here to learn more about the Foreign Tax Credit.
I already Paid Taxes on These Earnings Overseas?
Even if you have already paid tax on the foreign earnings overseas you still must report the information and disclose the earnings on your US tax return. But, when you disclose the account information you also claim what is referred to as an FTC (Foreign Tax Credit). In other words, while you are required to disclose the information regarding your foreign taxes, it does not mean you are subject to double taxation – you get a ‘Foreign Tax Credit’ for taxes you already paid.
Are There Penalties on the Outstanding Tax Liability?
No. Unlike the Offshore Voluntary Disclosure Program (OVDP) in which you have to amend your tax returns for eight (8) years as well as pay a 20% penalty on the total outstanding tax liability, under the streamlined program there is no additional penalty for the taxes; rather, there is a 5% penalty on the year-end account balances.
How is the 5% Penalty Calculated?
The penalties calculated as follows: a person will total their year-end balances for unreported accounts, for each year going back six years. If you are in the streamlined program this does not include the value of unreported foreign real estate which generates real estate income.
Once you have totaled the annual aggregate total of your foreign accounts for each year in the last six years, you pick ONY the highest year-end total, multiply it by .05 (5%) and that will be your penalty. In addition to this penalty, you also have to pay any additional tax liability for the last three years (if you have taxes due for unreported income) which result from amending the tax return (if there is any taxes due) as well as interest on the taxes.
I live Overseas, Do I Qualify for the IRS Penalty Waiver?
The IRS Streamlined Program carved out a very small niche for applicants who meet very specific residence requirements. In other words, if you reside overseas for at least 330 days in any one of the last three tax years in which you are filing an amended tax return, then you may qualify to have your 5% penalty abated. It is important to understand that this is not the same as the Foreign Earned Income Exclusion Test and the FEIF Bona-Fide Residence Exception under IRC 2555 does not apply.
Is my Foreign Real Estate Calculated into the Equation?
This can become a very complicated discussion, but keeping it simple it goes like this: if you as an Individual own foreign real estate that generated income and you qualify for the streamlined program, the value of the real estate is not included in the penalty competition. In OVDP the value of foreign real estate that generates income is included in the penalty computation.
To complicate matters, if you own foreign real estate within an investment such as a foreign mutual fund or possibly a foreign self-directed IRA, then the value of the account will include all the investments held in the mutual fund and if that includes foreign real estate then you may indirectly be subject to a penalty on that foreign real estate.
*If you are in this type of situation, you should consider speaking when experienced international tax lawyer before making any submission.
What Type of Accounts Must be Reported?
Generally, all foreign accounts must be reported. For example, Foreign Account reporting would generally include: 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), and Foreign Accounts held in a PFIC (Passive Foreign Investment Company)
Must Foreign Insurance Policies be Reported?
If there is a surrender value, then generally insurance policy must be reported. Foreign life insurance and life assurance policies generally have an investment mechanism to them, which provides monthly, quarterly or annual interest/bonus payments – as well as a surrender value – and if so, the policy must be reported.
What if I am Under IRS Audit or Examination?
If you are currently under IRS audit or examination, than you generally will be disqualified from the program. The idea is that the streamlined program and OVDP are voluntary programs and once you are under audit you are no longer acting “voluntarily.”
Of course, not every IRS agent is fully aware of the parameters of the program and once you receive the notice of audit letter from the IRS it may not hurt you to try to submit to the program but it can cause a major issue depending on whether the audit has anything to do with for accounts and other very personal and confidential information.
What is a Reasonable Cause Statement?
As an alternative to the streamlined program, some individuals opt to just submitting all of the prior documentation that was not previously disclosed or reported, along with a statement detailing why they have reasonable cause for failing to do so.
This is could be a risky move, because by doing so the person is disclosing all of their financial information to the Internal Revenue Service without any guarantee of non-prosecution. Since the penalties for failing to file and FBAR are exorbitant and even the non-willful person can be subject to a $10,000 per account penalty per year the applicant must be careful.
In other situations, the Reasonable Cause submission is a very viable option – you should discuss the facts in detail with an experienced Offshore Disclosure Lawyer.
But I have no tax liability?
The threshold requirement is not whether you owe tax based on foreign earnings and foreign accounts, but whether you properly disclosed your foreign accounts and income. In other words, if you have foreign income from your bank but there also bank fees and other deductions, which reduces your foreign interest income to zero, that does not mean do not have to report the account and income information.
Moreover, the failure to report the account and the “money” that was generated from the account is the problem and would still require disclosure. It also will not exempt you from tax and account reporting requirements.
What is Quiet Disclosure/Silent Disclosure
Honestly, it is a horrible idea to submit documents to the IRS via a Quiet Disclosure or Silent Disclosure. These types of disclosures occur when a person simply goes back and sneak reports/discloses the accounts without entering any program or submitting a reasonable cause statement. If a person does this, than they may be subject to criminal prosecution.
But if you have already done so (without understanding the ramifications of your actions) you can still get right by the IRS and submit under the streamlined program if your actions were non-willful (there are some people who inadvertently filed a quiet disclosure or silent disclosure because they were did not know they were required to even submit to a program or pay a penalty)
Does my Foreign Inheritance Count Toward the Penalty?
Yes. A distinction must be made between estate tax, income tax and reporting requirements. When a person has a foreign inheritance there may not be any estate tax on receiving the money, but if the account generates income then there is income tax. In addition, if the account value exceeds $10,000 (or the annual aggregate total of all the foreign accounts exceeds $10,000) the person must still report the information and therefore the value of the account will go towards the penalty.
Do I Receive Criminal Protection under the Streamlined Program?
No. While a person is almost guaranteed protection against prosecution under OVDP, there is no criminal protection under the streamlined program. Although, when a person is non-willful, criminal protection is generally not necessary.
What Type of Attorney Should I Hire?
IRS Voluntary Disclosure is a specialized area of law. An IRS Voluntary Disclosure is a complex undertaking. It requires the coordination of several moving parts, including strategy development, Tax Preparation, Legal Analysis, Negotiation and more.
You should hire a Tax Attorney who has the following credentials:
- ~20 Years of Private Practice experience representing his/her own clients
- Experienced in Criminal and Civil Litigation
- Experienced representing clients in Eggshell and Reverse Eggshell Audits
- Advanced Tax Degree (LL.M.)
- EA (Enrolled Agent) or CPA (Certified Public Accountant)
- Preferably a Board Certified Tax Law Specialist
Tax Law Specialty Firms are Best Prepared to Represent You in Specialized Tax Matters
Unless the firm has 50-100 attorneys, with a $25 million operating budget, a successful boutique tax-law firm will almost always have all of the attorneys in the firm devote the firms’s time, energy, and resources to one specific area of tax.
In other words, all the attorneys in the boutique tax firm practice the same, single area of tax law.
Some common niche areas of tax law include:
- Tax Litigation
- Employment Tax
- Sales Tax
- Offshore Voluntary Disclosure
For example, in employment tax, all tax attorneys in the firm handle employment tax related cases. In sales tax, all the tax attorneys in the firm handle sales tax. It may be “Sales Tax” in various different fields and industries — but the firm will limit the niche practice to sales tax.
The same is true for Offshore Voluntary Disclosure. If a firm handles Offshore Voluntary Disclosure, then all tax attorneys at the firm should be handling the same area of tax law.
This area of Offshore Disclosure law is constantly evolving, and becoming infinitely more complicated — including highly complex issues involving:
- International Cryptocurrency
- Increased Schedule B Enforcement (Paul Manafort)
- Foreign Gifts
- Foreign Inheritance
- Foreign Business
- Foreign Trusts
If a small firm has attorneys practicing 5-10 different areas of tax law (and even non-tax law related matters) – it can put your case at a severe disadvantage.
Why? Because it is impossible for these types of “general tax firms” to establish set protocols, policies and procedures sufficient to handle all the complexities and nuances for multiple different types of niche tax law areas.
At our tax specialty firm, we handle matters involving Offshore Voluntary Disclosure, and each case is led by one or more highly experienced attorneys.
This guarantees that your case gets the time and dedication it deserves.
Why Do We Care?
Because each month, like clockwork, we get calls from individuals in an utter state of panic, because the “Expert” or “Specialist” who made themselves out to be knowledgeable, has no real knowledge of Offshore Disclosure.
It turns out, the Attorney has never handled a complex Offshore Disclosure.
Oftentimes, Golding & Golding is called upon to fix these messes. Click Here to learn about some of the representative matters we have handled.
Serious Tax Matters; Serious Tax Consequences
Getting hit with an eggshell audit, reverse-eggshell audit, or IRS Special Investigation involving offshore money is serious business – it’s not like getting a traffic ticket or speeding ticket.
The ramifications of serious tax inquiries by the IRS (especially in the area of Offshore Disclosure and Compliance), can result in serious consequences such as monetary fines, penalties and even jail time.
We Specialize in Safely Disclosing Foreign Money
We have successfully handled a diverse range of IRS Voluntary Disclosure and International Tax Investigation/Examination cases involving FBAR, FATCA, and high-stakes matters for clients around the globe (In over 65 countries!)
Whether it is a simple or complex case, safely getting clients into compliance is our passion, and we take it very seriously.
Examples of areas of tax we handle
- Unfiled Tax Returns
- Unreported Income Penalties
- International Tax Investigations (FATCA and more)
- FBAR Investigations
- International Tax Evasion
- Structuring Investigations
- Eggshell and Reverse Eggshell Audits
- Divorce and Offshore Accounts
- Foreign Mutual Funds
- Foreign Life Insurance
- Fixing Quiet Disclosure
- Foreign Real Estate Income
- Foreign Real Estate Sales
- Foreign Earned Income Exclusion
- Subpart F Income
- Foreign Inheritance
- Foreign Pension
- Form 3520
- Form 5471
- Form 8621
- Form 8865
- Form 8938 (FATCA)
Who Decides to Disclose Unreported Money?
What Types of Clients Do we Represent?
We represent Attorneys, CPAs, Doctors, Investors, Engineers, Business Owners, Entrepreneurs, Professors, Athletes, Actors, Entry-Level staff, Students, Former/Current IRS Agents and more.
You are not alone, and you are not the only one to find himself or herself in this situation.
Beware of Copycat Law Firms
Unlike other attorneys who call themselves specialists or experts in Voluntary Disclosure but are not “Board Certified,” handle 5-10 different areas of tax law, purchase multiple keyword specific domain names, and even practice outside of tax, we are absolutely dedicated to Offshore Voluntary Disclosure.
*Click here to learn the benefits of retaining a Board Certified Tax Law Specialist with advanced tax credentials.
IRS Penalty List
The following is a list of potential IRS penalties for unreported and undisclosed foreign accounts and assets:
Failure to File
If you do not file by the deadline, you might face a failure-to-file penalty. If you do not pay by the due date, you could face a failure-to-pay penalty. The failure-to-file penalty is generally more than the failure-to-pay penalty.
The penalty for filing late is usually 5 percent of the unpaid taxes for each month or part of a month that a return is late. This penalty will not exceed 25 percent of your unpaid taxes. If you file your return more than 60 days after the due date or extended due date, the minimum penalty is the smaller of $135 or 100 percent of the unpaid tax.
Failure to Pay
f you do not pay your taxes by the due date, you will generally have to pay a failure-to-pay penalty of ½ of 1 percent of your unpaid taxes for each month or part of a month after the due date that the taxes are not paid. This penalty can be as much as 25 percent of your unpaid taxes. If both the failure-to-file penalty and the failure-to-pay penalty apply in any month, the 5 percent failure-to-file penalty is reduced by the failure-to-pay penalty.
However, if you file your return more than 60 days after the due date or extended due date, the minimum penalty is the smaller of $135 or 100 percent of the unpaid tax. You will not have to pay a failure-to-file or failure-to-pay penalty if you can show that you failed to file or pay on time because of reasonable cause and not because of willful neglect.
Civil Tax Fraud
If any part of any underpayment of tax required to be shown on a return is due to fraud, there shall be added to the tax an amount equal to 75 percent of the portion of the underpayment which is attributable to fraud.
A Penalty for failing to file FBARs
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.
A Penalty for failing to file Form 8938
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
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
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
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
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
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
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
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.
What Should You Do?
Everyone makes mistakes. If at some point that you should have been reporting your foreign income, accounts, assets or investments the prudent and least costly (but most effective) method for getting compliance is through one of the approved IRS offshore voluntary disclosure program.
Be Careful of the IRS
With the introduction and enforcement of FATCA for both Civil and Criminal Penalties, renewed interest in the IRS issuing FBAR Penalties, crackdown on Cryptocurrency (and IRS joining J5), the termination of OVDP, and recent foreign bank settlements with the IRS…there are not many places left to hide.
4 Types of IRS Voluntary Disclosure Programs
There are typically four types of IRS Voluntary Disclosure programs, and they include:
- Traditional (IRM) IRS Voluntary Disclosure Program
- Streamlined Domestic Offshore Procedures (SDOP)
- Streamlined Foreign Offshore Procedures (SFOP)
- Reasonable Cause (RC)