U.S. citizens, resident aliens and certain nonresident aliens are required to report worldwide income from all sources including foreign bank account reporting and pay taxes on income from those accounts.
There are many legitimate reasons for holding offshore accounts, including convenience, investing and to facilitate transactions in the foreign country of residence. By law, U.S. taxpayers are not permitted to use offshore accounts, such as foreign bank and securities accounts as well as trusts, to avoid paying tax (aka intentionally “hiding” assets offshore to avoid taxes and foreign bank account reporting).
In most cases, affected taxpayers need to fill out and attach Schedule B to their returns. Part III of Schedule B asks about the existence of foreign accounts and usually requires U.S. citizens to report the country in which each account is located.
Separately, taxpayers with foreign accounts whose aggregate value (based on the highest value for each individual account during the calendar year) exceeds $10,000 any time during the year fall under the mandatory foreign bank account reporting and must file FinCen Form 114, Report of Foreign Bank and Account Reports (FBAR) electronically through the FinCen BSA E-Filing system. The FBAR (foreign bank account reporting) is not filed with a federal tax return and must be filed by June 30 each year and unfortunately no extensions are available.
Failure to complete and file the required foreign bank account reporting on the existence of offshore accounts or pay taxes on these accounts can lead to civil and criminal penalties. For the FBAR, the penalty may be up to $10,000, if the failure to file is non-willful; if willful, however the penalty is up to the greater of $100,000 or 50 percent of account balances; criminal penalties may also apply.
Important Changes To The Foreign Bank Account Reporting And Compliance Programs
On June 18, 2014, the IRS announced important changes to their foreign bank account reporting and compliance programs that will both expand and help make it easier for U.S. taxpayers to come forward and report undisclosed foreign accounts under the streamlined filing compliance process and offshore voluntary disclosure program (OVDP). The effect of these changes will allow more taxpayers to come forward and report their delinquent foreign account disclosures and either amend or file original individual tax returns as well.
Expanded Streamlined Filing Compliance Process For Foreign Bank Account Reporting
Prior to these changes, a large number of U.S. taxpayers only option to avoid prosecution was if they disclosed foreign accounts under the OVDP program and paid a substantial penalty. Something that admittedly was a tough pill to swallow.
While a streamlined filing compliance procedure was available, it was quite restrictive and left many taxpayers with the choice of entering OVDP and paying a substantial penalty or flying under the radar and filing a quiet disclosure.
The expanded streamlined procedures are now available to a wider population of U.S. taxpayers living outside the country and, for the first time, to certain U.S. taxpayers residing in the United States. The streamlined filing compliance procedures are available to taxpayers that can certify that their failure to report foreign financial assets and pay all tax due did not result from willful conduct. The changes include:
- Eliminating a requirement that the taxpayer have $1,500 or less of unpaid tax per year;
- Eliminating the required risk questionnaire;
- Requiring the taxpayer to certify that previous failures to comply were due to non-willful conduct
For eligible U.S. taxpayers residing outside the U.S., all penalties will be waived. For eligible U.S. taxpayers residing in the U.S., the only penalty will be a miscellaneous offshore penalty equal to 5 percent of the foreign financial assets that gave rise to the tax compliance issue.
If the IRS has initiated a civil examination of a taxpayer’s returns for any taxable year, regardless of whether the examination relates to undisclosed foreign financial assets, the taxpayer will not be eligible to use the streamlined procedures. Similarly, a taxpayer under criminal investigation by IRS Criminal Investigation is also ineligible to use the streamlined procedures.
Taxpayers eligible to use the streamlined procedures who have previously filed delinquent or amended returns in an attempt to address U.S. tax and information reporting obligations with respect to foreign financial assets (so called “quiet disclosures” made outside of the OVDP or its predecessor programs) may still use the streamlined procedures by following the instructions for the new streamlined program. However, any penalty assessments previously made with respect to those filings will not be abated.
The improvements to the streamlined program now provide a way for a much broader group of U.S. taxpayers that live abroad and within the U.S. a way to catch up on their U.S. filing requirements including foreign bank account reporting without paying the steep penalties from the OVDP filing procedure.
Please click on Streamlined Filing Compliance Procedures for additional details on the revised streamlined program for foreign bank account reporting.
Modified Offshore Voluntary Disclosure Program (OVDP)
The Offshore Voluntary Disclosure Program (OVDP) is a voluntary disclosure program specifically designed for taxpayers with exposure to potential criminal liability and/or substantial civil penalties due to a willful failure to complete the required foreign bank account reporting and pay all tax due in respect to those assets.
OVDP is designed to provide taxpayers with protection from criminal liability and terms for resolving their civil tax and penalty obligations.
The OVDP program has been modified as well. Participating in the offshore voluntary disclosure program will require more information to be provided than in the past, such as the submission of all account statements at the time of application into the program (versus providing on request) and in some cases paying more in penalties as compared to the prior iteration of the program. Other changes include:
- Enabling taxpayers to submit records electronically rather than on paper;
- Eliminating the existing reduced penalty percentage for certain non-willful taxpayers in light of the expansion of the streamlined procedures;
- increasing the offshore penalty percentage (from 27.5% to 50%) if, before the taxpayer’s OVDP pre-clearance request is submitted, it becomes public that a financial institution where the taxpayer holds an account or another party facilitating the taxpayer’s offshore arrangement is under investigation by the IRS or Department of Justice.
Please click on Offshore Voluntary Disclosure Program for additional details on the revised OVDP program and the requirements for foreign bank account reporting.
Balanced Approach To Foreign Bank Account Compliance
In my opinion, these changes provide a more balanced approach available to taxpayers that were caught between a rock and a hard place – in that the late FBARs were non-willful in nature, but didn’t qualify for the streamlined program in place at that time, but at the same time the taxpayer didn’t really need the protection from criminal prosecution offered by the OVDP and certainly no desire to pay the hefty penalties under that program.
It is important to note that starting on July 1, banks around the world started to come forward with information on their U.S. customers. While it will take time for banks to start transmitting account information and of course time for the IRS to process the information, it is important for everyone to know that the IRS and the U.S. Treasury Department have significantly increased their ability to track down individuals that haven’t disclosed their foreign assets. From their viewpoint, a failure to disclose is as a result of the intentional hiding of assets.
We encourage taxpayers who are concerned about their undisclosed offshore accounts to come in voluntarily before learning that the U.S. is investigating the bank or banks where you hold accounts or have received information on your undisclosed accounts. By then, it will be too late to avoid the new higher penalties under the OVDP of 50 percent – nearly double the regular 27.5 percent – and to avoid risk of criminal prosecution.
For anyone who wants to come into compliance but isn’t sure what to do, I recommend talking to us at Tax Samaritan for help in determining which option is the most appropriate for you.
Our goal at Tax Samaritan is to provide the best counsel, advocacy and personal service for our clients. We are not only tax preparation and representation experts, but strive to become valued business partners. Tax Samaritan is committed to understanding our client’s unique needs; every tax situation is different and requires a personal approach in providing realistic and effective solutions.
Click the button below to request a quote for the preparation of your delinquent foreign bank account disclosures (known as the FBAR disclosure reported on the FinCen Form 114) and amended or original tax returns today to get started on the path towards foreign bank account reporting compliance.
Tax Samaritan is a team of Enrolled Agents with over 25 years of experience focusing on US tax preparation and representation. We maintain this tax blog where all articles are written by Enrolled Agents. Our main objective is to educate US taxpayers on their tax responsibilities and the selection of a tax professional. Our articles are also designed to help taxpayers looking to self prepare, providing specific tips and pitfalls to avoid.
When looking for a tax professional, choose carefully. We recommend that you hire a credentialed tax professional such as Tax Samaritan that is an Enrolled Agent (America’s Tax Experts). If you are a US taxpayer overseas, we further recommend that you seek a professional who is experienced in expat tax preparation, like Tax Samaritan (most tax professionals have limited to no experience with the unique tax issues of expat taxpayers).
Randall Brody is an enrolled agent, licensed by the US Department of the Treasury to represent taxpayers before the IRS for audits, collections and appeals. To attain the enrolled agent designation, candidates must demonstrate expertise in taxation, fulfill continuing education credits and adhere to a stringent code of ethics.
Every effort has been taken to provide the most accurate and honest analysis of the tax information provided in this blog. Please use your discretion before making any decisions based on the information provided. This blog is not intended to be a substitute for seeking professional tax advice based on your individual needs.