Recently a client forwarded us a letter she received from her bank in Switzerland. The letter asked about her compliance with IRS offshore reporting requirements. Checking with other tax lawyers, we learned she is not alone. Several foreign banks are now asking their customers to document IRS compliance. The question from our client was simple; “How should I respond?”
In her case, the answer was simple. She had already been accepted in the IRS’ tax amnesty program called the Offshore Voluntary Disclosure Program (OVDP). Millions of other U.S. taxpayers have not yet come into compliance. How should they answer?
First, some background. Federal law requires U.S. taxpayers to disclose their foreign bank accounts and other financial assets if the aggregate value of those accounts exceeds $10,000 (in US dollars) at any time during the year. Reporting is done on one’s individual income tax return (Schedule B) and on a Report of Foreign Bank and Foreign Accounts (FBAR). Failure to file an FBAR may be a crime and carries huge civil penalties.
Many foreign born Americans, expats living overseas and dual nationals have not yet complied with the law. Next year, the Foreign Account Tax Compliance Act (FATCA) will require banks to examine their customer accounts and report those with ties to the United States. Some banks are acting now and making sure their customers are in compliance.
If your offshore bank asks about your compliance, how should you respond?
Obviously, if you are filing FBARs and reporting any offshore interest income, the answer is simple. You are in compliance.
Taxpayers who have availed themselves of any of the OVDP amnesty options or who have made a voluntary disclosure / opt out can also claim they are in compliance.
Some folks may be inclined to simply ignore the bank’s requests. That will almost mean that your account will be closed. Banks can be penalized if they do not comply with the new law. Unfortunately, some banks have simply decided that they don’t want any American account holders.
Another option is to simply close your account and open an account elsewhere. The IRS is expected to seek information on Americans who closed accounts in advance of the new law. You might not get caught for a year or so but eventually the IRS will probably catch up. As noted above , the civil penalties for noncompliance are huge. (The IRS is also able to look back for several years.) Another problem with closing your account now is that the IRS considers moving money ahead of the new FATCA law as an affirmative act of tax evasion.
Probably the worst option if confronted by your bank is simply to amend your old returns and file the back FBARs. The IRS calls this a “quiet disclosure” and says it will pursue penalties. By filing old FBARs, you have given the IRS a roadmap to your assets making the penalty calculation easy.
If you are not already in compliance, we recommend hiring an experienced IRS attorney well versed in FBARs and the new FATCA law. Why an attorney? Unfortunately, accountants don’t enjoy the same attorney – client privilege that lawyers have. That means the IRS can obtain your records from your accountant even without your permission.
Coming into compliance is easy with professional help. Once you are in compliance, a good expat tax service or CPA should be able to file future FBARs for you at minimal cost.
The risks of noncompliance are simply too high to try navigating the initial back reporting alone. With a good attorney, you may be able to avoid most or all of the penalties if you can demonstrate that your failure to report your foreign bank accounts was not willful. (The current base amnesty penalty is 27.5% of the highest account historic account balance but as noted, that can often be reduced.)
Need more information? Call us. We gladly provide confidential, no-fee initial consultations to help answer your questions and explain your responsibilities. Thereafter, most services can be provided on a reasonable flat fee. We also help foreign financial institutions comply with the new law.
For a free consultation, contact one of our experienced FBAR lawyers today: Attorney Bethany Canfield at or by phone at (414) 223-0464. Brian Mahany at or (414) 704-6731. All inquiries are protected by the attorney – client privilege and will be answered within 1 business day. (We also have hundreds of text searchable posts on our Due Diligence blog.)
Mahany & Ertl – America’s FATCA attorneys. Services provided worldwide.
Post by Brian Mahany, Esq.