Delinquent FBAR Submission | Practical Options You Need To Know
FBAR Quiet Disclosures
FBAR Quiet Disclosures are strongly discouraged by the IRS. While it is tempting to fly under the radar, particularly when the next best option is voluntary disclosure and mandatory penalties (under OVDP or the Streamlined Domestic Offshore Procedures), it is very compelling in our current regulatory environment and age of global information sharing to not make light of this admonishment.
The IRS has stated on numerous occasions that they are aware that some taxpayers have attempted so-called “quiet” disclosures by filing delinquent FBARs and amended returns and paying any related tax and interest for previously unreported offshore income without otherwise notifying the IRS. To date, many taxpayers that have made FBAR Quiet Disclosures have not received any formal notification or penalty from the IRS from such disclosures. Will that continue? We can only speculate.
From my viewpoint, I believe that the direction of the IRS will lead to correspondence examinations for unfiled FBARs and unreported foreign income on a similar scale that exists when the IRS compares information reported on a return to third party information reported to the IRS (i.e. W2s, 1099s, etc.) and issues CP2000 letters.
On January 12, 2015, the IRS announced the opening of the International Data Exchange Service (IDES) for enrollment. Financial institutions and host country tax authorities will use IDES to securely send their information reports on financial accounts held by U.S. persons to the IRS under the Foreign Account Tax Compliance Act (FATCA) or pursuant to the terms of an intergovernmental agreement (IGA), as applicable. More than 145,000 financial institutions have already registered through the IRS FATCA Registration System and the U.S. has more than 110 IGAs, either signed or agreed in substance. Financial institutions and host country tax authorities will use the international data exchange service to provide the IRS information reports on financial accounts held by U.S. persons.
The opening of the International Data Exchange Service is the start of a secure system of automated, standardized information exchanges among government tax authorities. This will enhance the ability of the IRS and other foreign countries to detect hidden accounts and help ensure fairness in the tax system (in other words full and complete reporting and compliance).
Given the magnitude of the potential penalties to underreporting, even small errors or mistakes have the risk to result in a substantial cost to taxpayers and in turn revenue to the Federal government. Armed with information from the international data exchange, this task to identify and penalize negligent taxpayers will become much more easy in our opinion.
As a cautious tax professional, I think it would be naïve to believe that the IRS and U.S. government is going thru this effort and at the end of the day just sit on this data goldmine and do nothing. While my opinion is that the penalties, particularly as it relates to disclosure of foreign accounts, is egregious, we must deal with the hand that is dealt in our current regulatory environment and make the best decision moving forward with tax and FBAR compliance given current options.
Currently, taxpayers are strongly encouraged to come forward under one of the Voluntary Disclosure Procedures to make timely, accurate, and complete disclosures. Meanwhile taxpayers making “quiet” disclosures should be aware of the risk of being examined and potentially criminally prosecuted for all applicable years even though many years may have passed since disclosure with no negative consequences. The voluntary disclosure procedure options for late FBAR disclosures include:
- Delinquent FBAR Submission Procedure
- Streamlined Filing Compliance Procedures – Foreign and Offshore
- Offshore Voluntary Disclosure Program (OVDP)
Delinquent FBAR Submission Procedure
If you have reported and paid tax on all taxable income, are not under examination or investigation by the IRS and have not been contacted by the IRS, but did not file FBARs, use the Delinquent FBAR Submission Procedure. With this procedure, there is no de minims amount of unreported income. Thus, if there is $1 of unreported interest income, this is not the procedure for you.
Under the delinquent FBAR submission procedure, the IRS does not impose a penalty for the failure to file the delinquent FBARs, but does require a statement explaining why the FBARs are being filed late when electronically filing the late FBARs.
Streamlined Filing Compliance Procedures – Foreign and Offshore
The streamlined filing compliance procedures are available to taxpayers that can and do certify that their failure to report foreign financial assets and pay all tax due in respect of those assets did not result from willful conduct.
With the Streamlined Domestic Offshore Procedure, there is a Title 26 miscellaneous offshore penalty equal to 5 percent of the highest aggregate balance/value of the taxpayer’s foreign financial assets during the years in the covered tax return and FBAR period. Even in light of the penalty that potentially can be significant, a major benefit of the FBAR Streamlined Procedures to keep in mind is that the taxpayer will not be subject to accuracy-related penalties with respect to amounts reported on those returns, or to information return penalties or FBAR penalties, unless the examination results in a determination that the original return was fraudulent and/or that the FBAR violation was willful. With a “quiet disclosure”, a taxpayer will be subject to all of these penalties and perhaps more.
Thus, a critical factor when using one of the streamlined disclosure procedures is ensuring that the delinquent FBAR was not as a result of willfulness.
What Is FBAR Willfulness
Willfulness has been defined by courts as “an intentional violation of a known legal duty”. According to the Internal Revenue Manual (IRM), the only thing that a person need know is that they have a reporting requirement. If a person has that requisite knowledge, the only intent needed to constitute a willful violation of the requirement is a conscious choice not to comply. It means you acted with knowledge that your conduct was unlawful and a voluntary, intentional, violation of a known legal duty and there was no compliance – in other words, the FBAR was not filed.
The IRS says it needs to establish that you had knowledge of a duty to file FBARs. If you did, you knew it was illegal not to file one. But if you didn’t know about FBARs, you may not necessarily be off the hook. The failure to learn of filing requirements, known as “willful blindness”, or efforts to conceal the existence of the accounts, may mean a violation is willful. Some courts say willfulness is an intentional effort to disobey the law, but it can also be inferred by conduct. It can mean conduct meant to conceal your accounts. Your conduct is relevant and your patterns can all be factors that suggest willfulness. It can be as simple as foreign banks and advisers advising you about your FBAR filing requirements and that you should comply (and guess what… the last few years many foreign banks have been doing just that by issuing by issuing informal cautionary letters and more formal Declaration of Consent letters).
It is important to know that a conscious effort to avoid learning about reporting requirements through willful blindness can in effect deem your situation as willful. Thus, be sure to take an honest look and ask yourself if there is a chance that your situation could be considered willful. It there is a chance, even a remote chance, get some advice about your facts with a formal legal review with the experienced partnership of a tax professional and attorney, such as is available from Tax Samaritan.
Offshore Voluntary Disclosure Program (OVDP)
The Offshore Voluntary Disclosure Program offers taxpayers whose failure to report financial assets and undisclosed income was willful, the opportunity to disclose foreign accounts and unreported income rather than risk detection by the IRS and possible criminal prosecution. It provides protection from criminal prosecution, of which the streamlined procedures do not.
Under OVDP, there is an “offshore penalty”, the miscellaneous Title 26 offshore penalty, equal to 27.5 percent (or 50 percent in circumstances where either a foreign financial institution at which the taxpayer has or had an account or a facilitator who helped the taxpayer establish or maintain an offshore arrangement has been publicly identified as being under investigation or as cooperating with a government investigation) of the highest aggregate value of OVDP assets.
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