FBAR compliance has become a primary issue for US taxpayers who have foreign bank accounts, investments, and assets exceeding $10,000 at any point in the calendar year. You are required to report them on the IRS Foreign Bank Account Report, also known as FBAR form, each year. This procedure has been in place for several years; however, many U.S. taxpayers have not fully disclosed the extent of their foreign accounts and balances. In 2010, the U.S. Congress passed the Foreign Account Tax Compliance Act, also known as FATCA. This legislation targeted offshore banks, sovereign nations, and tax reporting agencies. It requires them to disclose information regarding U.S. taxpayers, or they would be forced to withhold a 30% tax and face exclusion from American markets. US taxpayers, including foreign nationals who reside in the US who do not come into IRS FBAR compliance face draconian penalties and potential criminal prosecution and jail time.
As a result, over 70,000 institutions (and growing) worldwide have signed onto FATCA and are providing information about U.S. citizens, residents, and U.S. taxpayers, including their accounts and balance information, directly to the IRS. The U.S. Justice Department pursued several prominent Swiss financial institutions for criminal acts relating to helping U.S. taxpayers avoid paying U.S. income taxes. The success of these cases has added even more weight to the U.S. Justice Department and the IRS, and foreign banks, investment houses, and even sovereign tax authorities have decided to provide information on U.S. taxpayers.
Is Your Conduct Willful or Non-Willful From the IRS’ Perspective?
One of the primary factors US taxpayers will face when coming into FBAR compliance and other foreign informational reporting requirements is the concept of “Willful” or “Non-Willful” conduct on the part of the U.S. taxpayer. Evading U.S. income taxes is a criminal offense, and the IRS has promised to pursue criminal tax charges against offshore account violators. The Offshore Voluntary Disclosure Program, or OVDP, provides a conditional release from criminal exposure if the taxpayer makes a “complete and transparent” effort to come into compliance with offshore account and asset reporting. The taxpayer agrees to pay a 27.5% penalty on the highest aggregate balance for “accounts associated with tax noncompliance” in the associated look-back period.
If the taxpayer’s foreign asset and income non-compliance was “non-willful,” the IRS has provided the Streamlined Domestic Offshore Procedures, which allows the taxpayer to bring FBARs into compliance for a much lower 5% penalty. The big “catch” here is that the behavior of the taxpayer must be “non-willful,” and the IRS has been less than transparent about the types of behavior it will accept in this category. The decision point for our clients comes down to their appetite for risk:
“Are you willing to risk criminal tax exposure in order to claim “non-willful” conduct and take the lower 5% penalties provided under the streamlined program?”
If the IRS believes you purposefully withheld information or secreted money or assets to avoid paying U.S. taxes, your application to the streamlined program will be rejected, there will be no OVDP option available to you at that point, and you will be exposed to criminal tax evasion charges as well as fines and penalties up to and exceeding 100% of the cumulative balance of all your accounts at any point in the look-back period regardless of their present balance.
There are No More Safe Havens to Avoid Paying U.S. Taxes
The resulting combination of U.S. taxpayers reporting their financial institutions and accounts on IRS FBARs, and the offshore financial institutions providing information on U.S. taxpayers in order to comply with FATCA has resulted in the perfect storm for the IRS. U.S. taxpayers are finding it increasingly difficult to hide income and assets offshore, and are being forced to come into FBAR compliance in order to avoid massive penalties and interest and potential time in prison.
The IRS has identified a list of banks who it believes have willfully helped U.S. taxpayers to avoid income taxes, and if your institution is on this list you will be required to pay a 50% OVDP penalty, instead of the 27.5% provided by the standard OVDP or the 5% offered under the non-willful conduct covered by the Streamlined Domestic Offshore Procedures.
Contact an Experienced IRS FBAR, FATCA and Offshore Reporting Lawyers
If you have not yet come into FBAR compliance with FATCA and required IRS offshore account, asset and income reporting, we urge you to contact us for a free consultation at 866-631-3470 or contact usto schedule an appointment. The net around international banks, foreign investment houses, and sovereign tax authorities is tightening each passing month. Reduce your exposure to high penalties and interest, and eliminate your exposure to potential criminal tax evasion charges. Contact our experienced lawyers and learn about the protections of the “attorney-client privilege” and the extensive legal services, accounting expertise, and tax preparation services available from your single source: Allen Barron.