The window may soon be closing for individuals who are in delinquent compliance with reporting requirements for offshore financial accounts to easily come forward.
Currently, U.S. citizens and permanent residents who have a financial interest in or signature authority over offshore financial accounts are required to disclose such accounts if the aggregate amount in these accounts exceeds $10,000. Offshore accounts include bank, securities, brokerage, time deposit, options accounts, insurance policies with cash surrender values, annuities and foreign mutual funds. These accounts must be disclosed on Form FinCEN114, commonly referred to as the “FBAR” (“foreign bank account report”). In addition, taxpayers must report and pay tax on any income earned on these accounts, such as interest and dividends, on their income tax returns.
The penalties for failing to disclose offshore financial accounts can be very steep. If the Internal Revenue Service discovers the noncompliance with the reporting requirements, it can assess civil penalties up to $10,000 per account per each year of violation, if it determines that the violations were non-willful. If it determines the violations were committed willingly, the penalties can be up to the greater of $100,000 per account or 50% of the balance in the account at the time of the violation. The various criminal penalties that can be imposed include a fine of up to $500,000 or 10 years in jail, or both. These amounts are being adjusted for inflation going forward.
Many individuals who discover they are in delinquent compliance with the reporting rules choose to believe that the IRS won’t be able to find them, and that no one will ever know that they have these accounts. However, in today’s digital age, it seems increasingly easier for the IRS to become aware of such accounts. It has been reported that many foreign banks are cooperating with U.S. authorities and are now are asking account holders if they are U.S. citizens or residents. A prudent individual will come forward voluntarily, and avoid the risk that the IRS discovers the accounts and determines that the individual willfully chose to not comply with the reporting requirements. Currently, there are two formal programs in place for a taxpayer to remedy delinquent compliance.
The Offshore Voluntary Disclosure Program
The Offshore Voluntary Disclosure Program (OVDP) is a fairly straightforward program that involves a taxpayer applying for pre-clearance and submitting information. Under this program, the taxpayer will pay tax and interest on previously unreported income and pay a 20% accuracy-related penalty on such income. In addition, the taxpayer will pay a 27.5% OVDP penalty on the highest balance in each account over the life of the account for the reporting period of eight years. After acceptance and review, the IRS and the taxpayer will sign a closing agreement and the taxpayer will not be subject to any additional penalties or inquiries over the offshore accounts.
The Streamlined Disclosure Program
For those that feel the 27.5% OVDP penalty is too steep, the Streamlined Disclosure Program is an alternative means of coming forward. Under the program, taxpayers must pay tax and interest on the unreported income, plus the 20% accuracy-related penalty, pay a 5% miscellaneous offshore penalty on the value of the foreign accounts, and certify under penalties of perjury that the failure to report the income, pay tax or file the FBAR forms was due to non-willful conduct. This program will potentially subject the taxpayer to an audit of his tax returns for the past three years, but as long as the taxpayer has confidence in his ability to answer questions about the accounts and can demonstrate that his conduct was non-willful, this program and result in significant savings compared to the OVDP.
Short Window of Opportunity
The urgency is that the OVDP and Streamlined Disclosure Programs will end eventually. Staffing and funding at the Internal Revenue Service has been cut recently, and many believe that the IRS simply doesn’t have the workforce to continue handling these disclosures. In December 2016, the IRS Commissioner John Koskinen said, “[a]t some point, it’s going to end and then you’re going to be stuck with the normal process.”
The IRS has stated that it is committed to OVDP at least through November 2017. There are no guarantees of any formal OVDP or Streamlined Disclosure Program existing beyond that. The general feeling at the IRS seems to be that some version of these programs has been around for some years, and that anyone who was going to come forward under these programs should have already taken steps to do so.
Taxpayers who are still in delinquent compliance with foreign bank account reporting requirements should act now, while the programs are still in existence. Although it is quite possible that these programs or some modified version of these programs will continue to exist past the aforementioned November 2017 potential end date, it is better to submit formal disclosures now rather than risk being subject to the existing civil and criminal penalty scheme.
Should you have any questions about the foreign bank account reporting requirements and the programs to remedy delinquent compliance, please contact Leech Tishman’s Taxation Practice Group.