“The jig is up!” That was the lead in article just published in Forbes addressing the hundreds of thousands of U.S. taxpayers with unreported offshore accounts. After over a year of delays, the Foreign Account Tax Compliance Act – FATCA – is now in effect. Several days ago, foreign financial institutions began reviewing their accounts and looking for accounts owned by Americans or with ties to the United States. Although banks won’t need to turn over that data until next year, many banks are cooperating with independent requests and investigations from the IRS and U.S. Department of Justice.
Without question, all taxpayers with unfilled FBARs and unreported foreign accounts should immediately come into compliance. The question is how?
There are several options but the risks and rewards vary widely and the rules keep changing.
Option 1. Do nothing and continue to bury your head in the sand. Thousands are doing it but it is the most risky of the options. Sooner or later you probably will get caught. The IRS may be slow but FATCA will speed up the process and the IRS has become quite sophisticated in finding hidden accounts. Get caught and you may even face criminal prosecution.
Although the risks of criminal prosecution remain relatively low, the civil FBAR penalties are a real threat. How about the higher of $100,000 or 50% of the highest historic account balance? Worse, the IRS has in several recent incidents assessed those penalties for more than one year.
Option 2. Listen to the IRS and come into compliance through the IRS’ 2014 Offshore Voluntary Disclosure Program (OVDP for those who love acronyms). It’s easy. No audit. No criminal prosecution. And you may get a significant break on penalties.
Option 3. Start with the IRS’ OVDP amnesty program and then opt out. It’s getting more difficult to opt out and the chances for a better result are diminshed. That said, opt out remains a viable alternative for those who can demonstrate their actions were not willful yet don’t qualify for relaxed penalties under OVDP.
Option 4. Quietly file your missing FBARs and hope you dont get caught. The IRS calls this method of compliance a “quiet disclosure.” Like option 1, this one is very risky.
IRS audit statistics show the agency does not audit many FBARs. Some claim that is “proof” that you can a) file several years of missing FBAR forms and face little risk or b) simply file the current FBAR and hope the IRS doesn’t ask you or your bank any questions about how long you have held the account.
While its true that the IRS has yet to audit many FBAR filings, the IRS has made it very clear that they will pursue those that make quiet disclosures. They have to – few people would pay amnesty penalties if they thought they could get away with a quiet disclosure. We don’t anticipate a big uptick in FBAR audits withion the next 12 months but when they happen, things will get ugly. And they will happen; the IRS has the software capability of easily identifying those who go the quiet disclosure route.
Is this really an issue?
In 2007, just 281,349 people filed FBAR forms according to Forbes. The IRS estimates some 6 to 7 million people have offshore accounts. While some folks may have small offshore holdings under the IRS’ aggregate $10,000 threshold, there are still millions of folks who should be filing. As awareness of FATCA and the government’s aggressive enforcement policy increases, millions of Americans and green card holders are now wondering what they should do.
Unfortunately, there is no easy, one size fits all answer to the question, “What should I do”? But there are options.
Obviously, we do not advocate ignoring the problem or going the quiet disclosure route. As one columnist has written, ” The jig is up!” The penalties for doing so are off the charts and the odds of escaping an detection and audit are against you.
The various amnesty and opt out options require very careful consideration. Our recommendation is to speak with an experienced IRS tax attorney, CPA or expat tax service that specializes in delinquent FBAR filings. Whatever you do, don’t ignore the problem, go it alone or think you can outsmart the IRS. The feds may be slow but they have become very efficient at snooping out unreported offshore accounts.
The FBAR lawyers at Mahany & Ertl help taxpayers with a wide array of foreign reporting services. We are the CPAmerica’s organization of accounting firms provider of legal services for FBARs, FATCA, foreign gift tax reporting, foreign real estate reporting and other offshore tax issues. For most clients, our services can be handled for a reasonable flat fee. We also assist financial institutions with FATCA compliance questions.
Mahany & Ertl – America’s Offshore Reporting Lawyers