Less than half the people who call us about unfilled FBARs and unreported offshore accounts take action to come into compliance. Once upon a time the chances of getting caught were fairly remote. No more.
The willful failure to file an FBAR is a crime. Even if you are not prosecuted (few are), the IRS can and routinely does impose huge civil penalties. How big? Try $100,000 per unreported account or 50% of that account’s maximum historical balance. Unfortunately, many people don’t believe us and that is the segue to today’s post.
It’s the IRS’ job to educate taxpayers. Unfortunately their efforts have fallen short of the mark. Don’t believe us? Ask the government’s own audit and evaluation agency, the GAO. Both the Government Accountability Office and the IRS’ own Taxpayer Advocate says the agency has done a poor job of educating taxpayers with foreign accounts.
Still not sure? Consider this – the IRS says only a small percentage of people with offshore accounts have filed FBARs. This includes dual nationals, foreign born Americans, green card holders and Americans living overseas.
The reality is that the government will probably find you if you have an unreported foreign bank account, hedge fund, brokerage account or insurance policy with investment component.
Since 2008 the IRS has become very adept at finding offshore accounts. Foreign governments are increasingly cooperating in the IRS’ efforts as well.
Beginning next year, the Foreign Account Tax Compliance Act (FATCA) requires foreign financial institutions to sort through their account base and tell the IRS about accounts with ties to the United States.
So with the clock ticking and the chance of getting caught increasing, why are folks sitting on the fence? Enter the “Myths.”
Myth #1. “I won’t get caught.” Not everyone will get caught but the odds aren’t in your favor. If you do get caught, however, the penalties are draconian. The risk simply is not worth it.
Myth #2. “If I come forward I will have to pay a 50% penalty.” Let’s turn that one around. If you don’t come forward your chance of a 50% or more penalty is much higher.
The IRS is running an amnesty plan for taxpayers with unreported foreign accounts. The program, called the Offshore Voluntary Disclosure Program or OVDP for short, provides a get out-of-jail card, a promise of no audit and a reduced 27.5% penalty.
There are even better programs for taxpayers with smaller accounts and ex pats living in a foreign country.
If you can prove your actions were merely negligent, you might avoid all penalties. That is called a voluntary disclosure. Because the risks are so great with any unreported offshore account, we recommend enlisting an experienced FATCA attorney to help with voluntary disclosures and amnesty applications.
Myth #3. “Lawyers and CPAs are making this up to scare people.” Simply untrue. Look at our hundreds of blog posts on tax issues. There are dozens of stories about Americans under indictment or headed to prison because of an unreported account.
Myth #4. “I will just close the account and repatriate the money before I get caught.” Great idea but it won’t work. Whether or not the account is now closed doesn’t stop the IRS from seeking penalties. In fact, the IRS views sudden account closures or transfers of offshore accounts in anticipation of an audit to be an affirmative act of tax evasion.
Myth #5. “I will simply file the missing FBAR forms and amend my old returns – the IRS will never notice.” That is called a quiet disclosure and the IRS says doing that won’t work. The Service wants people with unreported accounts to come through the “front door” and deal with the IRS.
Myth #6. “I closed the account and spent the money already, how can I possibly pay the penalties?” That one is easy, the IRS offers payment plans.
Myth #7. “The entire tax system and especially the FBAR penalties are simply unfair.” Okay, thats not a myth. They probably are unfair. That doesn’t make the problem go away. As stated earlier, the time is now to comply. Once FATCA is implemented and your account is disclosed to the IRS, most taxpayers will lose their ability to enjoy any of the amnesty programs.
What are your next steps?
Getting off the fence is the most important first step. Once you decide to come into compliance, find a good IRS attorney. Our team of FATCA and FBAR lawyers can help with a wide number of foreign reporting issues.
Worried about the cost? Our rates are half the big firms and our work can usually be done on a flat fee basis.
Don’t let the myths keep you from taking charge of the situation while there is still time.
Post by Brian Mahany, Esq.