As 2013 draws to a close and the implementation of FATCA is just months away, we are hearing from more and more nervous taxpayers. Recently, we have begun hearing from taxpayers already in the IRS FBAR amnesty program (called the Offshore Voluntary Disclosure Program or “OVDP”.) Those folks are having second thoughts about the high 27.5% penalty and wondering if they can still opt out and proceed with a traditional, voluntary disclosure.
The quick answer is Yes, and in our opinion most should. That is a bold statement but experience suggests that folks who can demonstrate that their failure to file FBARs and report their offshore account was not “willful” are much better opting out.
Let me explain.
The Bank Secrecy Act has requires Americans to report foreign financial accounts. The law has been on the books since the 1970’s but only recently has the law been vigorously enforced. Failure to report an offshore account is punishable by huge civil penalties. In some cases, those who willfully failed to file FBARs can also be criminally prosecuted.
The threat of prison scares many taxpayers even though the risk of prosecution is extremely remote. We have found that most taxpayers with unreported accounts are dual nationals, green card holders, foreign born Americans, ex pats living overseas and Americans with foreign business interests. Only a small percentage of people with unreported accounts are deliberately trying to hide money from Uncle Sam.
The amnesty program is a great tool offered by the IRS that can cut penalties in half or more and help folks avoid criminal prosecution and an audit. The “get-out-of-jail-free” card isn’t available under the amnesty program if the source of your income isn’t legal. Drug dealers and money launderers need not apply.
The program is also not available for those already under audit, under criminal investigation or if the IRS already got your name from a bank. The latter will become a real problem once FATCA comes on line and foreign banks begin reporting thousands of Americans owning or having signature authority over foreign accounts.
The amnesty penalty for most participants is 27.5% of the highest historical balance of the unreported accounts. Even if you already closed your foreign account, the IRS still wants its penalties.
The penalties for non-willful violations are much lower. Because most taxpayers truly did not willfully fail to file FBAR forms, those folks may fare much better by going the traditional voluntary disclosure or opt-out route. “Opt out” refers to the process of opting out of the guaranteed penalty caps. (There are other programs for people with small accounts and ex pats living overseas.)
Each time we describe the opt out procedure, we hear many of the same questions.
Will I be prosecuted if I leave the amnesty program?
No! The chances of prosecution are remote. Unless you have other serious problems with your tax return or have illegal income, you won’t be prosecuted. The IRS encourages voluntary compliance. Punishing people for coming forward first would discourage anyone from ever filing missing returns or correcting mistakes.
Will my penalties be higher if I opt out?
Probably not. Although there are no guaranties when one elects to go the voluntary disclosure route, a recent government study found that most people do better opting out. Of course, it is the truly innocent who usually opt out. If you have any questions, an experienced FBAR and FATCA attorney can help you make the best informed decision.
Can I opt out if I am already in the OVDP program?
Of course, that is why it is called an opt out. We recommend every taxpayer start within the amnesty program. Amnesty is not a two way street. You can always opt out but can’t opt in. By starting everyone in the program, we can gather all the necessary facts and help you later make an informed decision. It is possible to opt out right up until the very end when you sign a close out letter.
Do I give up my rights to appeal FBAR penalties by opting out?
Absolutely not. If you are unhappy with the IRS’ decision on penalties you have a right to appeal.
Does it cost more to opt out?
Should I hire an FBAR lawyer to help me through the program?
Every lawyer and accountant charges differently. We recommend using a good CPA or ex pat tax service if you are current on your FBARs but hiring an FBAR lawyer if you have past due FBARs and have unreported offshore accounts. What you tell your lawyer is protected by the attorney – client privilege. Unfortunately, accountants and tax preparers don’t enjoy that same privilege.
That said, our firm charges flat fees for both the amnesty and a traditional voluntary disclosure or opt out. More importantly, we give taxpayers full credit for what they have already been charged as part of amnesty representation. Few other firms can say that. We also will represent you for free in most instances if it is necessary to appeal your case to tax court. Contact us for full details.
We hope this post answers your questions on opt outs and voluntary disclosures. If you have more questions and wish to speak with an experienced FBAR attorney, contact attorney Bethany Canfield at backfield@mahanyertl or by telephone at (414) 223-0464. The author of this post, Brian Mahany, may also be contacted at or by telephone at (414) 704-6731 (direct). All inquiries are protected by the attorney – client privilege.