Foreign Accounts Compliance Update
Posted on: April 22, 2019 | By: Stephen Dunn | Bank Secrecy Act, Delinquent FBAR Submission Procedures, Delinquent International Information Return Submission Procedures, Draconian FBAR Penalty, FBARs, Foreign Accounts Compliance, Penalties for Noncompliance, Statute of Limitations, Streamlined Procedures, The FBAR Filing Requirement, Voluntary Disclosures
Under the Bank Secrecy Act, a U.S. person with foreign account balances aggregating more than $10,000 at any time during a calendar year must file a FinCEN Form 114, Report of Foreign Bank and Financial Accounts, (“FBAR”), for that year. A U.S. person is subject to a $10,000 penalty for failure to file an FBAR. If the failure is determined to be “willful,” the penalty is the greater of 50% of the person’s high aggregate balance of foreign accounts, or $100,000, whichever is higher.
The statute of limitations on assessment of civil penalties with respect to an FBAR is six years, and it begins to run when the FBAR is due, whether it is filed or not. U.S. Treasury generally does not assert a penalty for failure to file an FBAR where the taxpayer voluntarily files the delinquent FBAR before U.S. Treasury discovers the deficiency and brings it to the taxpayer’s attention. For this reason, when a client owes delinquent FBARs, we file them as soon as possible.
“U.S. person” means a citizen or resident of the U.S.
The Internal Revenue Code requires a U.S. person to report income from foreign accounts on Schedule B, Interest and Ordinary Dividends, and Schedule D, Capital Gains. The Internal Revenue Code also requires a U.S. person to file various information returns with respect to foreign accounts. Such information returns may include, for example, Form 8938, Statement of Foreign Financial Assets, Form 5471, Information Return by U.S. Persons With Respect to Certain Foreign Corporations, or Form 3520, Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts. A U.S. person owning an interest in a foreign mutual fund must file Form 8621, Information Return of U.S. Person with Respect to a Personal Foreign Investment Company (“PFIC”), with his U.S. income tax return reporting income and other information with respect to the foreign mutual fund.
A U.S. person is subject to penalties for failure to file a tax return and failure to pay tax. A U.S. person is subject to a penalty of $10,000 for failure to file an information return. The Internal Revenue Service may abate penalties for failure to file a tax return or failure to pay tax the first time the taxpayer is required to file the tax return or pay the tax, or if there is reasonable cause for the failure to file the tax return or pay the tax. Where the taxpayer files the delinquent information return before the IRS discovers the deficiency and brings it to the taxpayer’s attention, the IRS generally will not assess the penalty for failure to file the information return. For this reason, a taxpayer with delinquent information returns should file them as soon as possible.
Congress enacted the FBAR filing requirement, and the penalties for failure to file an FBAR, to curb the evasion of U.S. income tax by the use of foreign financial accounts. The IRS has more than once acknowledged that FBAR the penalties do not apply to a taxpayer who has not evaded U.S. income tax. So, if a taxpayer has been filing U.S. income tax returns failing to report the taxpayer’s foreign accounts or income therefrom, we have amended U.S. income tax returns prepared for the taxpayer for the last three years reporting the taxpayer’s foreign accounts and income therefrom. If the amended tax returns report no tax due, we file them, making the taxpayer compliant with U.S. laws concerning foreign financial accounts. But if the delinquent tax returns do report tax due, we file them in a submission under the IRS’ Streamlined Filing Compliance Procedures.
Under the Streamlined Procedures for Residents of the U.S., the taxpayer files conforming amended U.S. income tax returns for the last three years. The taxpayer must pay a “miscellaneous Title 26 offshore penalty” equal to 5% of the taxpayer’s high aggregate balance of foreign accounts as of the end of the last six calendar years ended before the submission under the Streamlined Procedures for Residents of the U.S.
A Streamlined Procedures submission, whether by a resident or a nonresident of the U.S., must also include a statement of facts by the taxpayer that the taxpayer’s noncompliance was nonwillful. The vast majority of taxpayers are nonwillful. The classic willfulness profile is a taxpayer who transfers assets overseas for the purpose of evading U.S. income tax on them.
There is no penalty under the Streamlined Procedures for Nonresidents of the U.S. The Streamlined Procedures for Nonresidents of the U.S. may be used to file conforming amended tax returns, as well as previously unfiled, delinquent tax returns.
A U.S. resident with unfiled U.S. income tax returns is not a candidate for the Streamlined Procedures. We have delinquent income tax returns prepared for such a person for the last five years, and we file them. There is no assessment statute of limitations with respect to unfiled tax returns. In our experience, the IRS will not assess tax or penalties with respect to such a person for years earlier than five years back.
The IRS cancelled its Offshore Voluntary Disclosure Program (“OVDP”). This is a positive development. OVDP was by far the most onerous, costly foreign accounts voluntary disclosure program. OVDP was not appropriate for most taxpayers, as it was limited to taxpayers whose noncompliance was willful, and, as noted, most noncompliance is not willful. OVDP was a trap for unwitting advisers and their clients.
We bring taxpayers into compliance with U.S. laws concerning foreign financial accounts, and avoid or minimize penalties in doing so.
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