by Brian Mahany
I received an interesting call today from someone concerned about the IRS penalties for failure to file a Report of Foreign Bank and Financial Accounts, better known as an FBAR (TDF-90-22.1 for those looking for the IRS form number). For those not already aware of the penalties, the IRS can and routinely does assess penalties of $100,000 or 50% of the highest balance of an unreported foreign bank or brokerage account. And those penalties are for each year that an account is unreported. There are ways to beat these penalties, however.
U.S. taxpayers with more than $10,000 in offshore accounts are required annually to file an FBAR form. This year, certain taxpayers must also comply with the new Foreign Account Tax Compliance Act (“FATCA”) and file a form 8938 as well. (Filing one does not eliminate the need to file the other.) Offshore accounts are pretty broadly defined and include bank accounts, certificates of deposit, brokerage accounts, many foreign retirement plans and some insurance products.
Fail to file an FBAR and the government can impose a 50% penalty for each year the account is unreported. In certain cases, taxpayers can also be charged with a felony punishable by 5 years in prison. Take a hypothetical account with a $100,000 balance opened 8 years ago. Assuming no change in the balance, the IRS can impose $400,000 in penalties on an account that only contains $100,000! (50% or $50,000 x 8 years.)
The IRS is offering a tax amnesty called the Offshore Voluntary Disclosure Program. (Yes, it too has an acronym and is sometimes called “OVDI” or “OVDP”). Program participants don’t have to worry about criminal prosecution and face a one time penalty of 27.5% of the highest balance during the years in which the accounts were not reported. (The IRS is presently looking back 8 years.)
Twenty Seven (27.5%) percent is certainly a lot of money. There are ways to reduce that penalty, however.
First, the IRS does have two lower penalty tiers – 5% and 12.5%. The criteria for these special amnesty rates can be found in yesterday’s blog post. Basically, those lower penalties may be available if you inherited the account or the aggregate balances never exceed $75,000.
For some folks, the penalty may be further reduced or even waived.
How? Some taxpayers are better opting out of OVDP if they can prove that their failure to file FBARs was not willful.
Although every case is different, there are some common themes and scenarios in which an opt out becomes attractive.
First, if you told your tax preparer of your foreign holdings and relied on his or her advice, the IRS may find it impossible to prove willfulness. Sadly, many preparers and even a few CPAs and tax lawyers gave people bad advice. If your accountant knew of the foreign accounts but didn’t advise you to file an FBAR, you may get a break. (You may have a malpractice claim against him or her as well.)
Second, you can prove that your actions were not intentional. For example, many dual nationals and foreign born Americans send money “home” to family. They have no idea that their foreign account must be reported to the IRS. The same is true for the millions of Americans who retired or moved overseas.
Third, you paid tax on the income generated from the account (income includes such things as interest, dividends and capital gains) but simply forgot or didn’t know about the FBAR requirements.
This is not an exhaustive list.
Opting out of the amnesty program does involve some risk. The penalty provisions of OVDP are set in stone. Although there might be some dickering on whether or not an asset qualifies as an account, there is little fight on the rate. If you want amnesty, be prepared to write a check for 27.5% of the high balance.
Unlike the offshore voluntary disclosure program, an opt out also carries no guarantees. Expect to be audited and expect the need to “prove” your innocence. For those that can, an opt out may save tens or hundreds of thousands of dollars.
As you can tell from this post, the offshore disclosure rules are quite complex. They are also subject to change with little notice. If you have unreported offshore accounts, don’t try to deal with the IRS on your own. This is one of those times when it is critical to have a competent tax attorney familiar with offshore reporting requirements. The penalties are simply too high for error.
The tax lawyers at Mahany & Ertl have helped many people with offshore tax problems. FBAR filings, FATCA, OVDP, foreign partnership and gift returns, opt outs and amnesty filings are some of the services we offer. All inquiries to us are protected by the attorney -client privilege and kept in strict confidence.
Mahany & Ertl – Giving Taxpayers A Voice. Offices in Milwaukee, Wisconsin; Detroit, Michigan; Portland, Maine; Minneapolis, Minnesota & coming soon, San Francisco, California (tax only). Services available nationwide.