Streamlined FBAR (2018) – IRS Reduced Offshore Penalty Basics
Streamlined FBAR (2018) – Understanding IRS Reduced Offshore Penalties
When somebody talks about streamlining the FBAR penalty, they are talking about sidestepping the traditional OVDP program, and instead submitting directly to the Streamlined Filing Compliance Procedures (SFCP).
More specifically, they are referring to the Streamlined Domestic Offshore Procedures. That is because the Streamlined Domestic Offshore Procedures (SDOP) requires the payment of a 5% penalty, on the highest year-end, annual aggregate total balance within the 6-years compliance period (discussed below).
If a person qualifies as a foreign resident, then they would qualify under the Streamlined Foreign Offshore Procedures. Unlike the Streamline Domestic Offshore Procedures, the Streamlined Foreign Offshore Procedures provides for an FBAR penalty waiver – so that the individual or estate can submit prior returns and FBARs – without any penalty.
What is an FBAR?
FBAR is the Report of Foreign bank and Financial Account form. It is one of the most common IRS international tax forms, because it has a relatively low threshold requirement, and is a very broad form, encompassing many different types of foreign accounts.
Important FBAR Definitions
Outside of the United States. No same-country exception for reporting.
Account includes much more than just “Bank Accounts.” See below for an expanded summary.
Means the filing of the FBAR form, online on the FinCEN website.
Report of Foreign Bank and Financial Account Form.
TD stands for Treasury Department and is another way to identify the form.
FinCEN Form 114
FinCEN is a financial crimes enforcement network. FinCEN created the form initially back in the 1970s, but now the IRS enforces penalties.
The Bank Secrecy Act
What is an FBAR Penalty?
When a person fails to properly file an annual FBAR statement, and the IRS discovers or uncovers the non-filing, the U.S. Government has the right to penalize the individual for failing to properly file the FBAR.
The law is found in the Internal Revenue Code (aka Tax code) Title 31 USC 5321. This is the code section that authorizes the U.S. government to enforce FBAR penalties against any individual that fails to properly comply with the filing an annual FBAR. As crazy as it sounds, the penalties for your failure to properly file this form are borderline obscene.
The IRS has the authority to penalize you upwards of $10,000 per violation, per account for violations that were non-willful. In other words, if you didn’t even know you were supposed to file the form and report your annual maximum balance on an FBAR statement, the IRS can still penalize you upwards of $10,000 per account, per year.
Sounds absurd, right?
Take this Example: David is a Legal Permanent Resident (Green Card recipient) who relocated to the United States for work when he was 42 years old. David was transferred by his company to the United States initially on an L-1 visa due to his proficiency in science and management. David earned several million dollars during the first 20 years of his career, which he staggered over seven different accounts. These accounts earn about $50,000 in year in passive income.
Under the current state of the law, David could be penalized upwards of $70,000 per year for the six years of unreported FBARs – that is a whopping $420,000 penalty solely because he was unaware of the rule. He will also have to pay taxes, fines and penalties on the unreported income — along with additional fines for unreported FATCA form 8938.
*The reason it is six (6) years instead of three (3) years is due to a nuance in the law statute of limitations which states that when a person has more than $5000 of unreported foreign income, the statute of limitations is expanded from three (3) years to six (6) years.
**The FBAR is only one of several forms David did not file which can lead to additional penalties, including FATCA 3520, 3520-A, 5471, 8621, and FATCA Form 8938.
If the IRS reserves the power to penalize you $10,000 per violation, per account, per year for a non-willful violation – would you like to take a guess at what the penalty would be if they think you were fraudulent?
Answer: The penalty can reach $100,000 or 50% of the account value – whichever is greater.
Therefore, in a multiyear audit, you could easily be penalized 100% value of the account balances. But, at least you can take some solace in the fact that the IRS has reduced the maximum penalty from 300% down to 100%. In other words, using the six-year statute of limitations explained above, in prior years, the IRS could penalize you 300% value (50% per year, for a total of six years). At least now, the penalty is limited to everything you have…and nothing more.
How Streamlined Domestic Reduces the FBAR Penalty?
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.
Make Sure You are Non-Willful
Willful vs. Non-Willful is an analysis which is both simple…and complex.
You are willful if you knew you were supposed to report and disclose your foreign income and assets but choose not to. If you decide to enter one of the IRS Offshore Voluntary Disclosure Programs, you will be required to submit to OVDP instead of the Streamlined Program. You may also be willful if you acted with Reckless Disregard or “Willful” Blindness.
You are non-willful if you were unaware of any reporting requirement and/or relied upon a CPA, Enrolled Agent, Accountant, or Tax Preparer who was unaware of any reporting requirement – but recent changes in the law may limit the ability to rely upon an “uninformed CPA.”
If you make false representations or omissions to your CPA, EA, or Accountant — you are presumably willful, despite what inexperienced Attorneys will tell you.
For more on this topic, click here: The IRS OVDP Willfulness Dilemma – Penny Wise & Pound Foolish.
A Summary of the basics:
If you know or should have known (or acted with Reckless Disregard) that you had a duty to report the information on an FBAR (Report of Foreign Bank and Financial Accounts) or to the IRS on a U.S. Tax Return (8938 – Statement of Specified Foreign Assets), but intentionally do not report your accounts, then the IRS will want to try and prove you acted “willfully,” in order to collect massive fines and penalties from you.
If you knew you had to report but were unaware what a FBAR or FATCA Reporting was, it does not negate the issue of willfulness. If your CPA sent you a questionnaire that you completed improperly, chances are you are willful as well — unless you did not understand the questions in the questionnaire.
You are non-willful if you acted unintentionally and/or did not know you were required to either report or disclose your foreign income, accounts, or other specified assets.
Offshore Disclosure is the process of coming forward and disclosing overseas assets and foreign income to the IRS in exchange for (in most cases) a much reduced chance of prosecution by the Internal Revenue Service. Whether a taxpayer is Willful or Non-Willful will determine which Offshore Disclosure Program the taxpayer should enter — and what their penalty will be.
Whether or not an applicant will have to pay an OVDP penalty (and if so, how much they will have to pay) or qualify for a reduced penalty (or penalty waiver) under the Streamlined Compliance Procedures will depend on a few different factors – with the most important factor being whether the applicant was willful or non-willful.
I Knew I was Required to Disclose But Didn’t…
Then you are willful.
While there is no strict definition of the word willful, it generally boils down to knowledge of the requirement to disclose. Alternatively, if you did not know that you were required to report your foreign accounts, then technically you could not have “willfully” failed to report the accounts, because you did not know about the requirement to do so in the first place.
– If you were willful, then you should be careful not to enter the IRS Streamlined Program (in order to take advantage of reduced penalties), because if you are “caught” entering Streamlined when you were actually willful, there can be very stiff civil and criminal penalties. Rather, you should enter the Offshore Voluntary Disclosure Program if for no other reason than because you were willful and you will require IRS Tax protection from criminal prosecution. If at the conclusion of the OVDP you disagree with the penalties, you will have the opportunity to “Opt-Out” at that time.
– While the penalty for OVDP is high, consider the alternatives: would you rather admit willfulness, pay a 27.5% penalty (or 50% penalty) for one-year’s worth of high-balance and both prevent a future audit and almost always prevent criminal prosecution, or would you rather live in constant fear of being audited, pay upwards of $1 million in fines and penalties, have a “felony” on your record, and do 5 to 20 years in federal prison with real criminals if you get caught?
If I was Only Willful for a Few Years, Can I Go Streamlined?
The IRS is clear: If you were willful at all, then you cannot qualify for the IRS Streamlined Program. There are no exceptions for people who were only willful for a year or two, and no exceptions for people who only failed to report “small” amounts of income. We find it abhorrent that there are other attorneys putting potential clients in serious financial risk, as well as harm’s way for a potential IRS Criminal Investigation, by pushing them into Streamlined when they know the client was willful.
Incredibly, these unscrupulous attorneys recommend that if a person was only willful for a “little while” then they can still go Streamlined. These attorneys typically have no real experience in OVDP, and probably represented clients in a handful of Streamlined Cases — and have never seen the inside of a courtroom.
On multiple occasions, we have had clients come to us after retaining one of these dreadful firms, who were now terrified because they realized that they paid an inexperienced Offshore Disclosure Attorney a “small fee” to go streamlined, when they admitted to the Attorney they were willful. Click Here for a Case Study Example of what can occur when you go Streamlined when you were willful.
Once you submit to the Streamlined Program, you can not thereafter submit to OVDP.
If a person is willful, they do not qualify for Streamlined or Reasonable Cause. It doesn’t matter whether it was 1-year, 5-years or 10-years worth of non-compliance.
**While the extent of the willfulness penalties might be mitigated through an OVDP Opt-Out, you should never submit a reasonable cause letter or streamlined submission if you were willful. This is especially true, since the IRS has begun auditing Streamlined Submissions.
Tip: The reason these firms push you into Streamlined when they know you were willful is to make a quick buck from you. Obviously a person would prefer to go Streamlined and pay a reduced penalty, and these Attorneys prey upon that feeling — at a time when you may be vulnerable. They need your business and need your money, and will throw ethics out the window to get it. Remember, you only get one bite at the Apple.
It is not their money or their freedom on the line – it is yours, so be careful…
Offshore Voluntary Disclosure Options
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.
If you are required to file a U.S. tax return, it is very important 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.
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