In the past, having an interest in or signature authority over a foreign financial account did not attract the level of attention and scrutiny that it does today. This is because in the past foreign banking secrecy laws prevented even the disclosure of the identity of the account holder or holders and their links to the United States. Today, this no longer holds true. The IRS and the US government have expended significant resources in promoting and creating international regulatory and reporting regimes. FATCA provides a basis for the mandatory disclosure of certain asset types. Report of Foreign Bank Accounts (FBAR) through the Banking Secrecy Act (BSA) creates a disclosure obligation when the aggregate balance of a foreign financial account or accounts exceed $10,000.
What are the Penalties for Failure to comply with FBAR reporting requirements?
The penalties for failing to comply with FBAR requirements can be particularly harsh regardless of whether the violation is willful or non-willful. If your failure to comply with FBAR is considered non-willful, meaning that it did not involve an intentional or voluntary disregard of a known legal duty, you could face the potential penalty of $10,000 per an undisclosed account for every tax year where the account went unreported. If the violation involves a willful act, including willful blindness, then because there is a six year statute of limitations the penalty can rapidly eclipse the account balance. The penalty for a willful failure to comply with FBAR can result in the penalty of the greater of $100,000 or 50% of the account balance. Consider that if the original account balance was $200,000 a 50% penalty each year over the course of six years would result in the imposition of a penalty of $600,000 – triple the original balance.
OVDP can be made less favorable at any time
The Offshore Voluntary Disclosure Program is a discretionary program offered by the IRS to encourage noncompliant taxpayers to come forward and correct their past tax mistakes. The program was established in 2009 and has been in effect as taxpayers have acclimated to the disclosure requirements set forth by FATCA and FBAR via the Bank Secrecy Act (BSA). However because the program is discretionary the IRS can change the rules of the program, eliminate the program, or make the terms less favorable at any time. The IRS does, indeed, modify the program from time-to-time with the last major revision occurring in June of 2014. On the whole, these changes made the terms of OVDP more severe for many taxpayers. These changes included:
- If it becomes public knowledge that the filer’s financial institution is under investigation by the IRS or US Department of Justice prior to OVDP pre-clearance then the offshore penalty jumps from 27.5% to 50%. There are already a dozen financial institutions on this list, and more could be added at any time.
- OVDP filers must pay applicable penalties much earlier than previously.
- Individuals who failed to file certain offshore information reporting returns used to be able to avoid penalties entirely if all of their income had been reported. Now these individuals must prove reasonable cause for failure to file.
In short, the changes result in more difficult terms being imposed on filers as public awareness grows. Future changes may lead to the imposition of even more onerous consequences. If you have foreign accounts that have yet to be disclosed, delay will only result in less favorable circumstances when you are discovered or have no choice but to come forward.
OVDP is no longer an option if you are under tax investigation
While OVDP can provide a pathway to correct past mistakes regarding offshore accounts, the window of opportunity can close in an instant. This is because if a taxpayer comes under IRS investigation then he or she is no longer eligible to avail themselves of the OVDP program. The taxpayer in this situation is in an incredibly difficult situation because the loss of the option of an OVDP program has removed one of the noncompliant taxpayer’s sources of leverage: coming forward voluntarily. The IRS agent may consider steps you took to find a home for your funds when a foreign bank insisted you close your account to be measures to conceal the FBAR violation. You could then find yourself facing civil tax fraud charges or criminal tax evasion charges in additional to your FBAR compliance issues.
The Brager Tax Law Group helps clients fix FBAR problems
If you are concerned that you may have failed to fully comply with FBAR or other tax obligation, don’t wait for the IRS to find the mistake and prosecute you. Working with an experienced tax professional from the Brager Tax Law Group can result in more favorable outcomes than simply waiting and hoping for the best. We work to develop a legal strategy that will allow you to come back into compliance with the US Tax Code while minimizing the consequences. To schedule a consultation call (800) 380 TAX LITIGATOR or contact us online.