Unreported Foreign Bank Account Holders: Beware of IRS ScrutinyMay 05, 2016
The IRS has heightened its scrutiny of unreported foreign bank accounts; be sure to comply with their regulations to avoid onerous penalties.
It’s been over 10 years since the federal government declared war on U.S. persons (citizens and tax residents) who have not reported the existence of their foreign bank accounts. There is no sign that the federal government is easing up on their efforts.
IRS scrutiny heightened
Even in a climate where the Internal Revenue Service’s budgetary resources are strapped, every indication is that the IRS and the Justice Department are devoting even more resources into forcing US owners of foreign bank accounts to come into compliance with the existing reporting rules. Although the US government’s battles with Swiss banks have been well documented in recent times, the IRS is also looking at financial institutions around the world, including the Caribbean, Panama, Luxembourg, Israel, India, and elsewhere.
Are the rules limited to those living in the U.S.?
The rules are not limited to those who are currently residing in the U.S. A U.S. person living abroad also has the same reporting responsibilities as they would if living in the U.S. Specifically, U.S. persons who have a financial interest in or signatory authority over any non-U.S. bank, securities, or “other” financial accounts must report them if their aggregate value exceeds $10,000.
What are the penalties for failure to file?
The penalties for failing to file these forms make the stakes very high for those who are not in compliance. The civil penalty for “willfully” failing to file this foreign bank account report (FinCen 114) may be as high as the greater of $100,000 or 50% of the total balance of the foreign account. Criminal penalties may also be applied where the IRS and Justice Department believes that the noncompliance is due to willfulness. Even non-willful violations are subject to a $10,000 penalty per account per year.
Offshore Voluntary Disclosure Program
In our own practice, we continue to see a steady stream of families who have gotten caught unaware of these reporting obligations and are coming forward to get things cleaned up. The good news is that the IRS has offered an Offshore Voluntary Disclosure Program (OVDP) to allow certain taxpayers to come forward and get into compliance under a reduced penalty structure.
Streamlined filing process
Additionally for individuals who can represent that their omissions were non-willful, the IRS more recently established a less onerous “streamlined” fling process that entails less years and lower penalties. Americans living abroad who agree to disclose six years of foreign accounts and pay U.S. taxes for the previous three years can do so without paying any penalties. If the taxpayer is living in the U.S., a penalty of five percent of the highest account balance over the six year period applies.
If one has failed to file foreign bank account reports but has no unreported income they do not need to avail themselves of any of the formal programs and can simply submit the delinquent forms with an explanation of why they are being filed late (according to IRS instructions).
What should I do if I have unreported foreign accounts?
If you currently have unreported foreign accounts, doing nothing is not a particularly good plan as relief under the various special programs is contingent upon coming clean before the IRS finds you. At a minimum, you should review your specific facts with a professional and assess your options.
If you need help on these matters, a member of our Global Tax Services (GTS) practice would be happy to discuss your situation. Contact us today.