Why Closing an Unreported Foreign Account is Not a Solution

Why Closing an Unreported Foreign Account is not a Solution

Should I Close My Unreported Foreign Accounts?

In recent years, the Internal Revenue Service has made enforcement of foreign account, asset, investment, and income reporting a key compliance priority. In a now all too familiar scenario, a US Person (Citizen or Resident) will come to learn that they did not report their foreign assets or income to the IRS in prior years. Unfortunately, due to all the unnecessary and inaccurate fear-mongering that taxpayers will undoubtedly find during their online research quest about FBAR and FATCA, they conclude that they may be in serious trouble – when in fact, oftentimes these matters can be resolved relatively straightforward and without any fear of criminal or willful civil penalties. One immediate knee-jerk reaction that many taxpayers have is simply to close the foreign accounts or transfer them to another non-US person and hope the matter goes away without reporting them through one of the offshore amnesty programs. This is not a good strategy, and here are three reasons why:

FATCA Banks/Brokerages May Have Already Reported You

FATCA is the Foreign Account Tax Compliance Act. More than 110 countries have entered into FATCA agreements (IGAs) with the United States — with hundreds of thousands of foreign financial institutions actively reporting Taxpayers to the US government. These Foreign Financial Institutions report US account holder information regarding foreign account balances and income generated from the accounts. In addition, some of these institutions also identify whether they have updated the customer about self-certifying compliance. Therefore, the IRS may already have your information, and you are not aware of it – at that point, just going off and closing the accounts and not reporting it can lead to (avoidable) problems down the line.

Reverse Eggshell Audit

If the Internal Revenue Service already has your information about the undisclosed foreign accounts and assets, that does not mean they are going to tell you about it. If you are selected for audit and the IRS starts asking questions about foreign accounts, you may be under the false presumption that the IRS does not know about it because they have not yet identified it as part of the audit. Oftentimes, the IRS will use the reverse eggshell audit strategy in which the IRS knows about the information, but you do not know they know about the information, and your responses may lead to self-incrimination.

You Turned a Non-Willful Violation into a Willful Violation

If you have some unreported foreign accounts, assets, or income and did not report them but were unaware of the reporting requirements, this is usually a relatively straightforward fix. Taxpayers can opt to use one of the non-willful submission options, such as the Streamline Procedures, Delinquency Procedures, or Reasonable Cause, to resolve the problem. But if you make false statements to the IRS and you are caught, you no longer qualify for a non-willful explanation/submission and instead may become subject to much higher willfulness penalties and even a criminal investigation if they believe you were fraudulent. Especially for non-willful taxpayers who reside overseas, may qualify for a complete penalty waiver.

Late Filing Penalties May be Reduced or Avoided

For Taxpayers who did not timely file their FBAR and/or other international information-related reporting forms, the IRS has developed many different offshore amnesty programs to assist Taxpayers with safely getting into compliance. These programs may reduce or even eliminate international reporting penalties.

Late-Filing Disclosure Options

If a Taxpayer is out of compliance, there are various international offshore tax amnesty programs that they can apply to safely get into compliance. Depending on the specific facts and circumstances of the Taxpayers’ noncompliance, they can determine which program will work best for them.

*Below please find separate links to each program with extensive details about the reporting requirements and examples.

Streamlined Filing Compliance Procedures (SFCP, Non-Willful)

The Streamlined Filing Compliance Procedures is one of the most common programs used by Taxpayers who are non-willful and qualify for either the Streamlined Domestic Offshore Procedures or Streamlined Foreign Offshore Procedures.

Streamlined Domestic Offshore Procedures (SDOP, Non-Willful)

Taxpayers who are considered U.S. residents and file timely tax returns each year but fail to report foreign income and/or assets may consider the Streamlined Domestic Offshore Procedures.

Streamlined Foreign Offshore Procedures (SFOP, Non-Willful)

Taxpayers who are foreign residents may consider the Streamlined Foreign Offshore Procedures which is typically the preferred program of the two streamlined procedures. That is because under this program Taxpayers can file original returns and the 5% title 26 miscellaneous offshore penalty is waived.

Delinquent FBAR Submission Procedures (DFSP, Non-Willful/Reasonable Cause)

Taxpayers who only missed the FBAR reporting and do not have any unreported income or other international information reporting forms to file may consider the Delinquent FBAR Submission Procedures — which may include a penalty waiver.

Delinquent International Information Returns Submission Procedures (DIIRSP, Reasonable Cause)

Taxpayers who have undisclosed foreign accounts and assets beyond just the FBAR — but have no unreported income — may consider the Delinquent International Information Return Submission Procedures. Before November 2020, the IRS was more inclined to issue a penalty waiver, but since then this type of delinquency procedure submission has morphed into a reasonable cause request to waive or abate penalties.

IRS Voluntary Disclosure Procedures (VDP, Willful)

For Taxpayers who are considered willful, the IRS offers a separate program referred to as the IRS Voluntary Disclosure Program (VDP). This program is used by Taxpayers to disclose both unreported domestic and offshore assets and income (before 2018, there was a separate program that only dealt with offshore assets (OVDP), but that program merged back into the traditional voluntary disclosure program (VDP).

Quiet Disclosure

Quiet disclosure is when a Taxpayer submits information to the IRS regarding the undisclosed foreign accounts, assets, and income but they do not go through one of the approved offshore disclosure programs. This is illegal and the IRS has indicated they have every intention of investigating Taxpayers who they discover intentionally sought to file delinquent forms to avoid the penalty instead of submitting to one of the approved methods identified above.

Current Year vs. Prior Year Non-Compliance

Once a Taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, Taxpayers should consider speaking with a Board-Certified Tax Law Specialist who specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties. 

Need Help Finding an Experienced Offshore Tax Attorney?

When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for Taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting. 

*This resource may help Taxpayers seeking to hire offshore tax counsel: How to Hire an Offshore Disclosure Lawyer.

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure. 

Contact our firm today for assistance.