Our Approach to Foreign Accounts Cases
Posted on: June 6, 2017 | By: Stephen Dunn | Delinquent FBAR Submission Procedures, FBARs, Foreign Accounts Compliance, OVDP, Streamlined Procedures
We place clients into compliance with United States laws concerning foreign financial accounts with the least possible work and expense.
In a typical case, a taxpayer or taxpayer’s representative calls us explaining that the taxpayer is out of compliance with U.S. laws concerning foreign financial assets. We assure the individual calling that our communications are protected by the attorney-client privilege. Then we interview the individual, and advise the individual on our recommendation for bringing the taxpayer into compliance with U.S. laws concerning foreign financial assets.
Filing Delinquent FBARs
We immediately file any FinCEN Forms 114, Report of Foreign Bank and Financial Accounts, (“FBARs”) due from the taxpayer over the preceding six years—the period of the statute of limitations on assessment of the 31 U.S.C. § 5321(a)(5) penalty for failure to file an FBAR. The statute runs from the due date of the FBAR, whether the FBAR is filed or not. This penalty is called the “draconian” penalty due to its amount—the greater of 50 percent of the account balance reportable on the delinquent FBAR or $100,000.
Internal Revenue Service guidance provides that IRS employees are not to assess the draconian penalty unless they have first contacted the taxpayer and requested the filing of the taxpayer’s delinquent FBAR(s). Once the taxpayer has been contacted, and 30 days pass without filing of the delinquent FBAR(s), IRS personnel may proceed with assessment of the draconian penalty against the taxpayer. Therefore, it behooves a taxpayer to file his or her delinquent FBARs due within the preceding six years as soon as possible.
Delinquent International Information Return Submission Procedures
Taxpayers who do not need to use the OVDP or the Streamlined Filing Compliance Procedures to file delinquent or amended tax returns to report and pay additional tax, but who:
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have not filed one or more required international information returns,
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have reasonable cause for not timely filing the information returns,
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are not under a civil examination or a criminal investigation by the IRS, and
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have not already been contacted by the IRS about the delinquent information returns
should file the delinquent information returns with a statement of all facts establishing reasonable cause for the failure to timely file.
Taxpayers must certify in the reasonable cause statement that any entity for which the information returns are being filed was not engaged in tax evasion.
All delinquent international information returns other than Forms 3520 and 3520-A should be attached to an amended return and filed according to the applicable instructions for the amended return. All delinquent Forms 3520 and 3520-A should be filed according to the applicable instructions for those forms. A reasonable cause statement must be attached to each delinquent information return filed for which reasonable cause is being requested.
Information returns filed with amended returns are subject to selection for audit as any other tax or information returns.
Streamlined Procedures Submission for Nonresident of the U.S.
Once the taxpayer’s delinquent FBARs have been filed, we have Forms 1040X, Amended U.S. Individual Income Tax Return, or Forms 1040, U.S. Individual Income Tax Return, as appropriate, prepared for the taxpayer. If the tax returns report tax owing, and the taxpayer is not a resident of the U.S., then we consider filing the tax returns in the context of a submission under the IRS’ Streamlined Offshore Compliance Procedures for Nonresidents of the United States. Such a submission includes a Form 14563, Certification by U.S. Person Residing Outside of the United States for Streamlined Foreign Offshore Procedures, signed by taxpayer under oath certifying how the taxpayer’s noncompliance was nonwillful.
A taxpayer is a “nonresident of the U.S.” for purposes of Form 14653 if—
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The taxpayer was physically outside of the United States for at least 330 full days in any one of the three most recent taxable years for which the filing deadline (as properly extended) has passed; and
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The taxpayer does not have an abode in the United States. “Abode,” or “tax home,” is similar in meaning to the legal term “domicile.” It is where a taxpayer resides and has principal social contacts, and intends to return if away for a time.
“Willfulness” is, essentially, noncompliance with specific intent to evade U.S. income tax. The classic willfulness profile is a taxpayer who transfers a large sum of money—$1 million or more—to a foreign country for the purpose of evading U.S. income tax on income produced by the funds. Typically the foreign country is one with bank secrecy laws. The taxpayer invests the funds in the foreign country, and then fails to report income from the foreign investments on his or her U.S. income tax return.
U.S. taxpayers are subject to U.S. income tax on their worldwide income, though they can avail of the U.S. foreign tax credit for income tax which they incur to foreign countries. Schedule B, Interest and Ordinary Dividends, to a U.S. income tax return asks, on Line 7a, whether the taxpayer had a financial interest in, or signature authority over, one or more foreign financial accounts during the tax year and, if so, whether the taxpayer is required to file to file an FBAR for the year. Falsely checking “No” to these questions can be evidence of willfulness, though this can be explained. An accountant may have prepared the tax return. The accountant may have checked “No” to the boxes on Schedule B, Line 7a without asking the taxpayer about foreign financial accounts. The taxpayer may have signed the tax return without reviewing it in detail.
Willfulness is difficult to prove. The government has the burden of proving willfulness, by clear and convincing evidence—higher than the usual civil standard of a preponderance of evidence. The IRS promulgated the Streamlined Procedures to ameliorate the harshness of its Offshore Voluntary Disclosure Program; the Streamlined Procedures should be liberally construed to accomplish their ameliorative purpose. The OVDP is reserved for taxpayers whose noncompliance was truly willful. A taxpayer should never be presumed to have been willful.
In a submission under the Streamlined Offshore Compliance Procedures for Nonresidents of the United States, the taxpayer submits an amended U.S. income tax return as needed for the years on which the assessment statute of limitations has not expired, and pays the tax owing thereon, and interest on the tax. The taxpayer incurs no penalty in a Streamlined Procedures submission for a nonresident of the U.S.
The Streamlined Offshore Compliance Procedures for Nonresidents of the United States are not available to a taxpayer who is under civil examination or criminal investigation by the IRS.
We use a delivery service such as UPS to make a Streamlined Procedures submission, receiving a signed delivery receipt therefor. The IRS generally does not acknowledge a submission Streamlined Offshore Compliance Procedures for Nonresident of the U.S. However, if the IRS finds a problem with the taxpayer’s Streamlined Procedures, it will bring it to the taxpayer’s attention, and request that it be corrected. If there is a balance due from the taxpayer or a refund due to the taxpayer with respect to a tax return submitted in a Streamlined Procedures case, the IRS will send the taxpayer a notice of the balance due from the taxpayer or the refund due to the taxpayer.
Streamlined Procedures Submission for Resident of the U.S.
If the taxpayer’s Forms 1040X or 1040, as the case may be, report tax owing, and the taxpayer is a resident of the United States (as “resident” is defined above), we consider making a submission for the taxpayer under the Internal Revenue Services’ Streamlined Offshore Compliance Procedures for Residents of the United States. Under the Streamlined Procedures for a resident of the U.S., the taxpayer—
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Files a U.S. income tax return or amended U.S. income tax return, as the case may be, for the three most recent years, on which the income tax assessment statute of limitations has not yet expired.
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Pays income tax due on the income tax returns or amended income tax returns, as the case may be, and interest due on the tax.
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Pays a “miscellaneous Title 26 offshore penalty” equal to five percent of the high aggregate year-end balance of foreign financial accounts beneficially owned by the taxpayer for the five most recent tax years.
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Files a Form 14654, Certification by U.S. Person Residing in the United States for Streamlined Domestic Offshore Procedures, (1) certifying the year-end balance of each of the foreign financial accounts beneficially owned by the taxpayer in each of the last six tax years, and (2) explaining that the taxpayer’s noncompliance was nonwillful (as “willfulness” is defined above).
The Streamlined Offshore Compliance Procedures for Residents of the United States are not available to a taxpayer who is under civil examination or criminal investigation by the IRS.
We use a delivery service such as UPS to make a Streamlined Procedures submission, receiving a signed delivery receipt therefor. It is the policy of the IRS not to acknowledge a submission Streamlined Offshore Compliance Procedures for Resident of the U.S. However, if the IRS finds a problem with the taxpayer’s Streamlined Procedures, it will bring it to the taxpayer’s attention, and request that it be corrected. If the IRS agrees with the taxpayer’s Miscellaneous Title 26 offshore penalty computation, it will send the taxpayer a Notice CP15, Notice of Penalty Charge, charging the taxpayer the penalty computed on the taxpayer’s Form 14654. If there is a balance due from the taxpayer or a refund due to the taxpayer with respect to a tax return submitted in a Streamlined Procedures case, the IRS will send the taxpayer a notice of the balance due from the taxpayer or the refund due to the taxpayer.
Offshore Voluntary Disclosure Program
In an OVDP case, the taxpayer must submit eight years of FBARs; submit eight years of amended income tax returns; pay the tax owing on the amended income tax returns, interest on the tax, and an “accuracy-related” penalty equal to 20 percent of the tax; pay a miscellaneous title 26 offshore penalty equal to 27.5 percent of the high year-end balance of the taxpayer’s foreign financial accounts over the eight-year disclosure period. This is a major commitment in tax, interest, penalties, and professional fees. The Streamlined Offshore Compliance Procedures were intended to ameliorate such harshness. Most taxpayers can become compliant by means of the Streamlined Procedures, the Delinquent FBAR Submission Procedures, or the Delinquent International Information Return Submission Procedures, discussed above. An OVDP case concedes willfulness. Only a taxpayer whose noncompliance was clearly willful should proceed under the OVDP. OVDP cases should be, and are, rare.
A taxpayer begins an OVDP case by submitting to the Internal Revenue Service From 14457, Voluntary Disclosure Letter, and for each of the taxpayer’s foreign financial accounts, a Form 14454, Attachment to Voluntary Disclosure Letter. The purpose of this is to identify the taxpayer to the IRS, so that the IRS can check its records and determine whether it is aware of the taxpayer’s noncompliance. An OVDP disclosure is, after all, supposed to be a voluntary disclosure. If the IRS is not aware of the taxpayer’s noncompliance, it notifies the taxpayer that he or she may proceed under the OVDP. Otherwise, the IRS notifies the taxpayer that he or she may not proceed under the OVDP.
It is rare for the IRS to reject a taxpayer’s application to the OVDP. If it happens, the taxpayer should make sure that he or she is compliant with U.S. laws concerning the filing of FBARs and the filing of income tax returns and payment of income tax.
Within 90 days after being admitted into the OVDP a taxpayer must submit to the IRS the following:
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An amended U.S. income tax return for each of the last eight years properly reporting the taxpayer’s interests in foreign financial accounts and income therefrom. This includes filing a properly-completed Schedule B, Interest and Ordinary Dividends, for each year, as well as all required Forms 8938, Statement Of Specified Foreign Financial Assets, Forms 5471, Information Return of U.S. Persons With Respect To Foreign Corporations, and other required information returns.
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Form 14453, Penalty Computation Worksheet.
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Form 14452, Foreign Account Asset Statement, for each of the taxpayer’s foreign financial accounts.
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Form 872, Consent To Extend Time To Assess Tax, for each of the years covered by the voluntary disclosure.
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Consent to Extend the Time to Assess Civil Penalties Provided by 31 U.S.C. 5321.
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A copy of each FinCEN Form 114, Report of Foreign Bank or Financial Accounts, (“FBAR”) filed for the taxpayer for years in the eight-year disclosure period.
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Payment of tax due on the amended income tax returns, and interest on the tax, together with an accuracy-related penalty equal to 20 percent of the tax.
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A miscellaneous Title 26 offshore penalty equal 27.5 percent of the taxpayer’s highest aggregate year-end balance of foreign accounts for the eight-year OVDP disclosure period.