Foreign Accounts

Got Unreported Assets Overseas? The Clock is Ticking

Foreign Bank Account Reporting (FBAR) Deadline June 30, 2015

Did Grandpa leave you his foreign bank account when he passed away? If you have foreign bank accounts holding more than $10,000 in the aggregate anytime during 2014, you are required to file an FBAR (Report of Foreign Bank Accounts) by June 30th (the 2014 FBAR must be received by the IRS by June 30, 2015). It doesn’t matter whether the foreign accounts generate income or not; just owning them, or having signature authority, requires you to file. There is NO extension to file the FBAR.

What’s the big deal?

Failure to file can result in serious consequences. The sanctions for not completing the FBAR include numerous severe civil penalties and potential prosecution followed by a term in federal prison.

What are your options for prior years?

No longer does one size fit all. Under the “Offshore Voluntary Disclosure Program” (OVDP), taxpayers must file 8 years of amended tax returns and FBARs and pay the additional income tax, penalties and interest as well as a 27.5% “FBAR-related” penalty on the highest balance of their foreign assets in the 8 year period. In June 2014 the IRS announced major changes to the program. Taxpayers who did not report foreign income or assets but whose non-compliance was “non-willful”, do not need to enter the OVDP, but can participate in the Streamlined Filing Compliance Procedures (“SFCP”) by filing only 3 years amended returns and 6 years of FBARs. No income tax penalty and only a 5% “FBAR-related” penalty are due. Under the new rules, any taxpayer seeking to participate in the OVDP, who at any point in the 8 year look back period had an account at a bank which has been publically identified as a target of an IRS criminal tax investigation or as having reached a non- prosecution agreement with the IRS, will be subject to a FBAR penalty of 50% (not 27.5%) on all foreign accounts and assets. Close to 100 Swiss banks are currently negotiating to enter into Non-Prosecution Agreements with the IRS, so the risk of facing a 50% penalty is growing.

We work with several law firms who specialize in this area and help their clients navigate the intricacies of the Voluntary Disclosure Program. For a summary of the Foreign Asset Reporting Requirements please click here: Foreign Asset Reporting . For assistance with your FBAR or entering the OVDP, please contact our Tax Manager, Steven Citron.

What is the Offshore Voluntary Disclosure Program?
Since 2009, the IRS has announced various initiatives for taxpayers with unreported foreign assets. The Offshore Voluntary Disclosure Program (OVDP) requires filing 8 years amended tax returns and 8 years of Foreign Bank Account Reports (FBAR). In addition to paying 8 years of taxes, taxpayers must pay a 20% “accuracy” penalty on the tax plus interest. Taxpayers must also pay a 27 ½ % “FBAR-related” penalty on the highest balance of their foreign assets in the 8 year period (includes investments other than bank accounts).

What are the Changes?
On June 18, 2014 the IRS announced major changes to the OVDP which results in three possible “routes”: First, U.S. residents who did not report foreign income or assets but who certify that their non-compliance was not “willful”, do not need to enter the OVDP, but are now able to address the issue by filing only 3 years amended returns and 6 years of FBARs. No income tax penalty and only a 5% “FBAR-related” penalty are due.

Second, those who cannot certify that their non-compliance was not “willful” can still join the OVDP. The June 2014 changes create a third category of those who enter the program after it becomes public that their foreign bank is under investigation by the IRS or Dept. of Justice. For these taxpayers, the June 2014 changes increase the 27 ½ % penalty to 50% of the highest balance (of the taxpayer’s foreign assets during the preceding 8 years). This 50% penalty can be avoided only by completing the detailed preclearance filing procedures before August 3, 2014.
For those who can’t certify non-willful non-compliance, the OVDP is the only way to cap their civil tax exposure and to avoid criminal prosecution and possible jail time.

What are the Risks?
For those who choose to certify that their non-compliance was not “willful”, be aware that there is NO protection against criminal prosecution if the IRS finds the Taxpayer’s certification of non-willful conduct not to be true. Furthermore, the taxpayer will then be considered ineligible to participate in the OVDP.

What Should I Do Now?
Taxpayers need to ask themselves some hard questions in order to determine if they are eligible to claim that their non-compliance was “non-willful”. Non-willful conduct is defined by the IRS as conduct that is due to negligence, inadvertence or mistake or conduct that is the result of a good faith misunderstanding of the requirements of the law.

Time is Running Out
The 2014 OVDP does not have a final end date. However, the IRS has reserved the right to end the program at any time. We work with several law firms who specialize in this area. Together with your legal counsel we can help you evaluate the most suitable alternative.