For the millions of Americans with unreported offshore accounts, the words FBAR and FATCA have caused many sleepless nights. For decades, federal law has required U.S. taxpayers to declare their foreign bank and other financial assets. Reporting is done annually on both the taxpayer’s individual income tax return and on a Report of Foreign Bank and Financial Accounts – FBAR for short. In 2010, Congress strengthened the foreign reporting requirements by passing FATCA (the Foreign Account Tax Compliance Act). That law requires foreign financial institutions to sort through their accounts and look for accounts owned by Americans or having ties to U.S. taxpayers.
Beginning next year, FATCA is expected to “catch” millions of Americans with unreported accounts. Although some people have deliberately used to offshore accounts in an attempt to evade taxes, most taxpayers simply don’t understand the rules. As those folks learn of the new law, many have panicked and some continue to bury their head in the sand hoping the law will go away.
The penalties for failure to timely file an FBAR are huge. The IRS routinely assesses penalties which are the greater of $100,000 or 50% of the highest value of the account. Although the IRS can go back many years, generally the IRS just imposes a penalty on the highest year. On a $150,000 account, that could be a $100,000 penalty!
Some folks have tried to quietly repatriate their money back to the United States thinking they will avoid the penalty. So far, the IRS isn’t buying it and soon foreign banks will be looking back in their records for people who moved their account in recent years.
So what is a taxpayer to do? First, a short primer on the law.
FBAR Filing Requirements
The FBAR requirements apply to any U.S. taxpayer no matter where they live. That means Americans with accounts in Israel or Switzerland, dual nationals, American workers residing Europe and U.S. resident aliens (green card holders). Uncle Sam wants a tax return from you even if you are filing and paying taxes elsewhere. A good CPA or ex pat tax service that specializes in foreign reporting can handle this very inexpensively.
What must be reported? If the aggregate value of your assets exceeds $10,000 (in U.S. dollar equivalents) at any point in the year, you must file an FBAR for all your accounts the following year and also report the accounts on Schedule B of your tax return income tax return.
It’s not just bank accounts that need to be reported. The FBAR filing requirements include foreign brokerage accounts, precious metal commodity accounts, certificates of deposit and may include foreign hedge funds, real estate and life insurance / annuity products. If you are not sure, speak to a knowledgeable CPA or FBAR attorney.
The big question on most people’s minds is what to do about their unfilled, past due FBARs. Simply filing them doesn’t work; the IRS calls that a “quiet disclosure” and says on their website that they intend to go back and audit those folks making quiet disclosures. (One exception may be for folks who reported their foreign income associated with the accounts such as interest, dividends and capital gains but just forgot to file an FBAR.)
Offshore Voluntary Disclosure Program “OVDI”
The best route is through a traditional disclosure or the IRS’ offshore tax amnesty called the Offshore Voluntary Disclosure Program – OVDP or OVDI for short.
OVDI is the easiest and offers no audit and no criminal prosecution but the penalties are steep. In most instances there is a one time 27.5% penalty based on the year with the highest balance. A good FBAR attorney can help reduce that by arguing that some accounts should be treated differently but expect to write a check no matter what.
Many taxpayers, if they are willing to undergo an audit and can explain that their failure to file an FBAR was not “willful”, can do much better by opting out of amnesty or filing a traditional disclosure (often called a voluntary disclosure). If the IRS believes that your failure to file was not willful, you may simply get a $10,000 penalty. Some taxpayers receive only a warning letter. There are no guarantees with a traditional disclosure, however, and if you don’t like the result there is no going back into amnesty.
The program rules are quite complex and change frequently. If you find yourself with missing FBARs, you really should consult with a tax attorney. The penalties are simply too severe to make a mistake. Having a lawyer help you will cost a bit more but the protection and peace of mind is worth it.
If you need more information and want to talk to an experienced IRS attorney, we offer no cost consultations. Our FBAR lawyers have helped dozens of taxpayers across the United States and worldwide. In most instances we offer reasonable flat fees. All inquiries are protected by the attorney – client privilege too. For more information, contact attorney Bethany Canfield at 414-223-0464 or by email at . You may also contact the author at (414) 704-6731 or by email at .
Post by Brian Mahany, Esq.