Articles Posted in FBAR Violations

Our tax attorneys have had many clients with Superannuation accounts in Australia. For those of you not familiar with Superannuation accounts, these are the Australian version of our tax-favored retirement plans. These Superannuation accounts, sometimes referred to as Supers, can be very problematic for immigrants from Australia to the U.S., because they may or may not be subject to taxation in the U.S. The ownership of a Super may trigger the requirement to file an FBAR (Foreign Bank Account Report, FinCEN Form 114, formerly TDF 90-22.1) and/or Form 8938, Form 3520 or Form 3520-A. The proper treatment of a Super under U.S. tax law has been the subject of many articles on the internet and confusion abounds. Part of this confusion is because there are different types of Supers and, depending upon the facts and circumstances, the U.S. tax treatment may differ.

Over a year ago, one of our tax lawyers had a conversation with the IRS’ Offshore Voluntary Disclosure Program (OVDP) hotline to ask about the treatment of a Super. We were told that no Form 3520 was required. The person we spoke to was obviously reading from a script and, of course, we asked for a copy. Just as predictably, we were told that it was an “internal document,” and, therefore, we couldn’t get it. This led our tax lawyers to file a Freedom of Information Act (FOIA) Request in early April 2015, which was received by the IRS, appropriately enough, on April 15th. The substance of the request was as follows:

Please provide all documents, including internal guidance materials and training materials, that have not previously been published in the Internal Revenue Manual or on the IRS’ website (including but not limited to memoranda, staff manuals, Powerpoint presentations, videos and any other materials) concerning or related to the IRS’ treatment of Australian superannuation accounts (aka “ASAs”) or other non-U.S. deferred compensation arrangements or employee trusts (but not including Canadian arrangements or trusts) for purposes of United States taxation and information return filing under the Internal Revenue Code (26 U.S.C. §1, et seq.), the Bank Secrecy Act (31 U.S.C. §15, et seq.), the Offshore Voluntary Disclosure Program (aka the “OVDP”), the Offshore Voluntary Disclosure Initiative (aka the “OVDI”), the Streamlined Filing Compliance Procedures (aka the “SFCP”) and/or Transitional Treatment under OVDP/I, including any such documents used by or available to IRS personnel working at the IRS’ Offshore Voluntary Disclosure Civil Hotline at (267) 941-0020.

One of the top priorities for the IRS and Department of Justice has been the focus on offshore financial accounts held by U.S. taxpayers, and used to avoid or defeat the assessment of tax. Underscoring the need for an increased focus on offshore tax enforcement is a 2008 U.S. Senate report showing that the use of offshore accounts results in the loss of more than $100 billion in tax revenues each year. From the DOJ’s use of “John Doe” summonses to force credit card and financial companies to release information about account holders, to FATCA and the Swiss Bank program, the U.S. government is committed to identifying and prosecuting taxpayers who avoid their tax obligations.

What is the Swiss Bank Program?

At its core, the Swiss Bank program allows Swiss Banks to pay fines, promise changes in the bank’s behavior, and pledge compliance and cooperation with FATCA and other offshore tax enforcement efforts in exchange for a deferred prosecution or non-prosecution agreement with the U.S. government. The deferred prosecution agreement provides the bank with legal assurances that it will not face further consequences for its alleged illegal behavior. Under terms of the Swiss Bank Program banks must:

In yet another sign of the rapidly expanding reach of FATCA and the U.S. government’s increased access to account data from around the world, the Turkish government reached a reciprocal information sharing agreement with the United States government. The bottom-line here is that taxpayers holding undisclosed accounts and assets in Turkey are now significantly more likely to have those accounts identified and to be linked back to those accounts. Taxpayers who are linked to undisclosed foreign accounts and assets can face significant fines and penalties.

A taxpayer who fails to satisfy his or her FBAR disclosure obligation can face a $10,000 per year penalty for even an inadvertent error. If the government agent believes that your FBAR compliance failure was the product of willful conduct, penalties that equal the highest account balance are not uncommon. Similarly, failures to disclose assets and accounts under FATCA can lead to an initial separate $10,000 penalty followed by significantly more harsh consequences for continued noncompliance with FATCA.

The Reciprocal Agreement Between the Governments of the United States and Turkey

On July 9, 2015, the United States and Indian governments announced that they had entered into a Foreign Account and Tax Compliance Act (FATCA) agreement. FATCA is a U.S. law that has been described by some as a “global banking law.” The reason for this characterization is because the law requires banks and other financial institutions located in foreign nations to take action. Foreign banks and financial institutions that fail to provide information required under FATCA can face up to a 30 percent withholding penalty. Such a significant penalty means that these foreign banks are highly likely to provide the U.S. government and its agencies like the IRS and the Department of Justice (DOJ) with foreign account information with links to U.S. citizens, permanent residents, and resident aliens.

Indian-Americans Living and Working in the United States: Beware of Undisclosed Foreign Accounts

For Americans holding assets or offshore accounts based in India, this news of an agreement between the nations may raise some alarm. FATCA appears to be a highly effective tool for the U.S. government in convincing or coercing foreign nations and entities to provide tax information. Americans holding or controlling assets or financial accounts in India must disclose these accounts if they have not already done so.

On July 31, 2015, President Barack Obama signed into a law HR 3236 a highway funding bill. Buried in the Bill is a provision which changes the filing date for Foreign Bank Account Reports (FBARs) to April 15th. Up until now the due date for the FBAR, which must be filed electronically on FinCEN Form 114 (formerly TD F 90-22.1) was June 30th. The Bill also provides for an extension of time of up to 6 months to file the FBAR, making the extended due date October 15th. This reconciles the due date for the FBAR with the individual tax return filing date.

Before now many taxpayers were tripped up by the differences in the filing dates. Because many taxpayers go on extension for their tax returns, and don’t have extensive discussions with their CPAs, or other tax preparers, until shortly before the extended deadline of October 15th there were many instances of individuals not realizing they had a filing responsibility until after the June 30th deadline. Those taxpayers were usually stunned to find out that the extension of the filing date for their tax return did not extend the time to file their FBARs. This was a common sense fix to an unnecessary problem.

The Bill also authorizes a first time abate (FTA) procedure of sorts. Specifically the Bill states: “[f]or any taxpayer required to file such [FBAR] Form for the first time any penalty for failure to timely request for, or file, an extension may be waived by the Secretary.” This appears to provide authority to abate an FBAR penalty if the FBAR is filed after April 15th, but before October 15th, if this is the first time the FBAR was due. The language doesn’t really add anything to the law since the IRS already has wide latitude to waive FBAR filing penalties.

On Friday the IRS released new guidance on how examiners should determine the amount of any penalty for the failure to file an FBAR (Report of Foreign Bank Account, FinCEN Form 114). The guidance is effective for all open cases as of May 13, 2015. It does not appear to apply directly to cases in the Offshore Voluntary Disclosure Program (OVDP), but it will impact clients’ decisions as to whether or not to opt-out of OVDP, or whether or not to enter OVDP in the first place.

Under the guidance examiners are instructed to make a determination of willfulness for each year of the examination. If multiple years are involved, and the conduct is willful, the total penalty amount for all years under examination is generally limited to 50 percent of the highest aggregate balance of all unreported foreign financial accounts. However, if the “facts and circumstances” justify it, an examiner may recommend a penalty of more or less than 50 percent, but in no circumstances will the penalty exceed 100% of the highest aggregate balance. Since there have been instances where the IRS has threatened penalties of 150% or more this finally places a limit on the maximum civil penalties. Presumably this was done, in part, to undercut any argument by taxpayers that the penalty violated the Constitutional prohibition against “excessive fines” that was raised in the Zwerner case in Florida. Examiners will continue to coordinate with Fraud Technical Advisors (FTA) if they have reason to believe a criminal referral may be appropriate.

If the examiner determines that the conduct was non-willful then in most cases the penalty will be limited to $10,000 for each year regardless of the number of unreported financial accounts. Previously the IRS position was that it would assert a penalty of $10,000 per year, per account. The guidance does provide that in some cases the “…facts and circumstances (considering the conduct of the person required to file, and the aggregate balance of the unreported foreign financial accounts) may indicate that asserting nonwillful penalties for each year is not warranted.” Examiners may in those cases assert a single penalty not to exceed $10,000 for one year only. The starting point for all nonwillful calculations, however will be the “mitigation guidelines” set forth in IRM 4.26.16.4.6 et. seq.

U.S. citizen, resident aliens and others who are U.S. taxpayers face a unique mode of taxation in the United States. That is, U.S. taxpayers are taxed on their worldwide income regardless of where it was earned. Predictably and understandably, this method of taxation results in many expatriates worrying about whether they will face double taxation – paying taxes on their income to both the nation they are living in and to the IRS. While there are provisions in the U.S. Tax Code, and various tax treaties to address the issue of double-taxation, these provisions can be difficult to understand, create problems for laypersons in ascertaining whether he or she qualifies, and it can present difficulties in maintaining compliance in future tax years as circumstances and finances change. However, the foreign earned income exclusion can be an essential tool in ensuring that an expatriate taxpayer does not face double-taxation and pay more than his or her fair share.

What is the foreign income exclusion?

The foreign earned income exclusion is one way the Tax Code accounts for the problems created by our status-based system of taxation. In general, U.S citizens or permanent legal residents living abroad are eligible to claim the exclusion. The amount of the exclusion is adjusted each year based on the rate of inflation. The amount of the exclusion for current and past tax years is as follows:

Since FATCA’s passage, critics of the law have assailed its provisions and the IRS’ interpretations of the law. However one of the most oft-repeated charges against the account disclosure statute was that the IRS, itself, was not ready for the law and could not handle the influx of data including complex tax filings. A December 2011 New York Times article lamented that the IRS was not prepared for the fierce reaction from overseas or differences in how each tax agency handles their process. For instance, at the time there was concern regarding how manual verification would work in tax systems like Japan’s which relies on electronic screening rather than manual actions.

Thus, foreign financial institutions were originally granted something of a temporary reprieve from FATCA and its obligations. Facing foreign pressure the IRS first delayed the registration deadline for foreign financial institutions until June 30, 2014. Then in May 2014, the IRS announced in Notice 2014-33 that the 2014 and 2015 tax years would be transition period for enforcement and administration purposes relating to entities only. Individual investors are still be required to comply with all FATCA provisions. The transition period does not delay FATCA implementation or effective dates.

However the promise of even greater detection and enforcement powers for the IRS is here. Recently, the IRS announced that its International Data Exchange Service had come online. Increased international FATCA compliance due to lower barriers to reporting should improve the IRS’ foreign account detection efforts.