Have undisclosed foreign financial assets? An Opportunity you don’t want to miss out to save on non-compliance penalties

Practice Areas

By: Baljeet Singh

It is no secret that there are harsh penalties involved when a US taxpayer have foreign financials assets or income from the sources that remains unreported. The penalties for each non-filing of related forms or information returns runs into minimum of $10,000 to hundreds of thousands of dollars depending on the number of years of non-compliance, numbers of forms remained unreported and the balances/value of the foreign assets involved. The good news is that Internal Revenue Services (IRS) currently have procedures that give an easy opportunity to the taxpayers, depending on their individual circumstances, to fix the previous errors and get back to tax compliance with substantially reduced or no penalties. The basic requirement is that the taxpayer must not be under a civil examination or a criminal investigation by the IRS, and have not already been contacted by the IRS about the non-compliance to avail benefit of any of the options. Currently the following are the various options offered by the IRS:

  • Offshore Voluntary Disclosure Program
    If the non-compliances related to foreign financial assets or liabilities are due to willful violation on the part of the taxpayers and hence have exposure potential criminal liability and/or substantial civil penalties, the Offshore Voluntary Disclosure Program (OVDP) from the IRS could help. The program provides protection from criminal liability and terms for resolving civil tax and penalty obligations. Under this program, the base penalty is 27.5 percent of the highest aggregate value of the foreign bank accounts or assets during the period covered by the disclosure. The penalty will be increased to 50 percent for any foreign financial accounts that were held at a bank that has been publicly identified as being under investigation or as cooperating with a government investigation.
  • Streamlined Filing Compliance Procedures
    The streamlined filing compliance procedures are available to taxpayers whose failure to report foreign financial assets and pay all tax due in respect of those assets did not result from willful conduct on their part.  The procedures are designed to provide to taxpayers in such situations a streamlined procedure for filing amended or delinquent returns and terms for resolving their tax and penalty obligations.The modified streamlined filing compliance procedures are designed for only individual taxpayers, including estates of individual taxpayers.  The procedures are available to both U.S. individual taxpayers residing outside the United States and U.S. individual taxpayers residing in the United States. Taxpayers using the Procedures will be required to certify that the failure to report all income, pay all tax, and submit all required information returns, including FBARs (FinCEN Form 114, previously Form TD F 90-22.1), was due to non-willful conduct.

    Eligible US taxpayers who resided outside the US in any one of the most recent three years for which US tax returns due date (including extension) has passed, will not pay any penalties. Eligible US taxpayers who resided in the US during this period will pay a penalty of 5% of the highest aggregate balance/value of taxpayers’ foreign financial account during the three years’ period covered by the tax return or six years covered by the FBAR.  The IRS will not impose accuracy related penalty, information return penalties, or FBAR penalties.

  • Delinquent FBAR Submission/Information Return Procedures
    These procedures allow taxpayers to file delinquent Report of Foreign Bank and Financial Accounts (FBAR) (FinCEN Form 114, previously Form TD F 90-22.1) and/or information returns along with a statement of reasonable cause for late filing. No penalty will be imposed by the IRS for the failure to file the delinquent FBARs or information return if the taxpayer properly reported on U.S. tax returns, and paid all tax on, the income from the foreign financial accounts reported.

Considering the possible exposure to harsh penalties, the ongoing efforts of the IRS to ensure tax compliance with regards to foreign financial assets, pressure on foreign financial institutions to disclose US account holder information and the cooperation expected among the governments around the world, it is highly recommended and will be prudent for US taxpayers having undeclared accounts review their individual situation with their CPA’s and/or legal counsel and opt for the best course of action.