Part 1: Consider the Offshore Voluntary Disclosure Program
If you have foreign accounts and fail to properly file your taxes with the Internal Revenue Service (IRS) there are big consequences.
Failure to File Form FinCEN 114 (“FBAR”)
Form FinCen 114, previously known as Form TD F 90-22.1 or FBAR, must be file if the aggregate value of your foreign accounts exceeds $10,000 at any time during the year. This is filed separate from your tax return and is due by June 30 each year. If you did not file your FBARs you could be subject to civil penalties of up to 50% of the highest balance in the account for each of the open years of the statute of limitations, which is six years from the FBAR due or $100,000 whichever is greater. Additionally, income generated from the foreign account and not reported on income tax returns is subject to assessment, a penalty of 20% of the taxes or in fraud cases up to 75%, plus interest. You could also be prosecuted for failing to file your FBAR and separately for willfully not reporting income on an income tax return. Sounds great, right?
Correct your errors
As with all government processes, there are multiple processes to allow you to come into compliance. But, picking the right approach can be challenging.
Before you can be allowed into the Offshore Voluntary Disclosure Program (OVDP) you must verify with the IRS Criminal Investigation Division (CID) that they is not currently an examination, investigation, or prosecution currently underway. You do this by submitting a pre-clearance letter to the IRS CID and then cross your fingers and hold your breath. If you are clear, the CID will send you a letter stating that you are conditionally accepted into the OVDP as long as you complete the program requirements. Don’t start your happy dance just yet, only if you complete the program requirements will you be protected from being prosecuted for failing to file an FBAR or not reporting income from your foreign account. The pre-clearance process was not as easy as it was prior to changes that were recently made to the program. A lot more information is required. The new and improved program is called the Modified OVDP or the 2014 OVDP. Your civil penalty will also be bound by the OVDP, which cannot exceed 27.5% of the highest balance over the previous eight years. If your accounts are held at certain banks that are already under IRS criminal investigation, the penalty could actually be as high as 50%. The good news still with the 50% penalty is that you will avoid criminal prosecution. The IRS has a list of the banks that are publicly disclosed as being “under investigation”, but beware in some instances, it could be possible that some banks have not yet made it to the list on the website, so I would check with a tax attorney that is familiar with OVDP and the Department of Justice procedures before jumping for joy if your bank does not appear on this list.
To complete the OVDP you must complete all requirements by:
- Signing consents that waive the statute of limitations allowing the IRS to assess your foreign account with regards to FBAR penalty, income tax, penalties, and interest.
- Filing FBARs for the previous eight years for your foreign account
- Filing an income tax returns reflecting the foreign account for the previous eight years
- Paying a penalty of either
o 27.5% of the highest balance in the account during the previous eight years (assuming your account was not on the list that would require the 50% penalty)
o 12.5% if the balance did not exceed $75,000
o 5% if you can be proven not willfully failing to report the account on an FBAR
- Paying income taxes on income generated by the foreign account for the previous eight years
- Paying an accuracy penalty of 20% of the above calculated income tax, and interest
Obviously gathering and compiling this list will not be easy and will require significant legal and accounting fees. Is this your best option? Maybe, maybe not.
Stay tuned for Part 2: Exploring the Streamlined Options
About Freeman Tax Law
Freeman Tax Law is equipped to handle all domestic and international tax law matters. At Freeman Tax Law, the attorneys and professional staff have vast experience with foreign tax compliance, international tax planning, and resolving tax controversies involving offshore banking matters. Freeman Tax Law helps taxpayers and foreign entities become in compliance with laws such as Foreign Account Tax Compliance Act (FATCA) and Offshore Voluntary Disclosure Program (OVDP) and Streamlined Compliance Procedure. In addition to handling complex tax controversies, the Freeman Tax Law team has extensive expertise in assisting clients with wealth management and estate planning.
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