Have you reported all of the income from the foreign accounts or offshore assets on your U.S. federal tax return? Have you filed all required Foreign Bank Account Reports (FBARs) and other foreign reporting information returns, such as the Form 5471 to report ownership of a foreign corporation or the Form 8865 to report ownership of a foreign partnership? Are you in compliance with the FBAR filings and foreign reporting for prior years? Are you aware of the substantial penalty risk and exposure that could apply if you are not in compliance with FBAR filings and foreign reporting for prior years? The late filing penalty is $10,000 USD per form per year for the FBAR and certain foreign reporting information returns such as the Forms 5471 and 8865. The penalty for the willful failure to file the FBAR is the greater of $100,000 USD or 50% of the highest account balance or value per year.
The IRS currently has several amnesty programs available for U.S. taxpayers with unreported foreign accounts and offshore assets. The best available option typically depends on whether the U.S. taxpayer has unreported income from the foreign accounts or offshore assets in addition to delinquent FBARs or other foreign reporting information returns.
Delinquent FBAR Submission Procedures
The IRS will allow U.S. taxpayers to file delinquent FinCEN Forms 114 Report of Foreign Bank and Financial Accounts (FBARs) for prior years without imposing any penalties if all taxable income from the reportable foreign accounts was properly reported on the U.S. federal tax return. To qualify, the U.S. taxpayer cannot be under a current civil or criminal examination by the IRS. This option is not available if the IRS has contacted the U.S. taxpayer regarding the delinquent FBARs prior to being submitted. The reason for filing the FBAR late should be included when the delinquent FBARs are filed. FBARs are not automatically subject to audit under these procedures but they may be subject to audit under the existing audit selection processes that are in place for tax and information returns.
Delinquent Information Return Submission Procedures
The IRS will allow U.S. taxpayers to file delinquent information returns without imposing the $10,000 late filing penalty for Forms 5471 and 8865, etc. if reasonable cause is demonstrated. To qualify, the U.S. taxpayer cannot be under a current civil or criminal examination by the IRS. This option is not available if the IRS has contacted the U.S. taxpayer regarding the delinquent information returns prior to being submitted. The delinquent information returns should be filed with an amended U.S. federal tax return including a reasonable cause statement.
Streamlined Domestic/Foreign Offshore Filing Compliance Procedures
The IRS will allow U.S. individual taxpayers to file six years of delinquent FBARs and three years of amended U.S. federal tax returns with delinquent foreign reporting information returns attached. All of the applicable FBAR and information return late filing penalties and accuracy-related penalties will not be imposed unless the amended returns are selected for audit through the regular audit selection process and the IRS is able to detect fraud on the original U.S. federal tax return and/or the FBAR delinquency was willful. There is a 5% Streamlined Domestic Offshore filing penalty that is based on the highest year’s aggregate balance or value of unreported foreign financial assets as determined at the year-end for each year. To qualify, the U.S. individual taxpayer must be able to certify under penalties of perjury that the delinquencies resulted from non-willful conduct. The U.S. individual taxpayer cannot be under a current IRS civil or criminal examination. This option is not available if the IRS has contacted the U.S. taxpayer regarding the delinquencies prior to filing the streamlined disclosure.
Offshore Voluntary Disclosure Program (OVDP)
The IRS OVDP is designed for U.S. individual taxpayers with foreign reporting delinquencies that involve willful or intentional conduct. The OVDP penalty is 27.5% of the highest year’s aggregate balance or value of unreported foreign financial assets. If the U.S. government has identified the foreign financial institution where the unreported foreign accounts are maintained on a publicized list then the OVDP penalty is increased substantially. A significant advantage of the OVDP is that it protects U.S. individual taxpayers from criminal prosecution for willful FBAR delinquencies which otherwise could result in imprisonment.