Articles Posted in Offshore Bank Account Problems

In yet another sign of the rapidly expanding reach of FATCA and the U.S. government’s increased access to account data from around the world, the Turkish government reached a reciprocal information sharing agreement with the United States government. The bottom-line here is that taxpayers holding undisclosed accounts and assets in Turkey are now significantly more likely to have those accounts identified and to be linked back to those accounts. Taxpayers who are linked to undisclosed foreign accounts and assets can face significant fines and penalties.

A taxpayer who fails to satisfy his or her FBAR disclosure obligation can face a $10,000 per year penalty for even an inadvertent error. If the government agent believes that your FBAR compliance failure was the product of willful conduct, penalties that equal the highest account balance are not uncommon. Similarly, failures to disclose assets and accounts under FATCA can lead to an initial separate $10,000 penalty followed by significantly more harsh consequences for continued noncompliance with FATCA.

The Reciprocal Agreement Between the Governments of the United States and Turkey

On July 9, 2015, the United States and Indian governments announced that they had entered into a Foreign Account and Tax Compliance Act (FATCA) agreement. FATCA is a U.S. law that has been described by some as a “global banking law.” The reason for this characterization is because the law requires banks and other financial institutions located in foreign nations to take action. Foreign banks and financial institutions that fail to provide information required under FATCA can face up to a 30 percent withholding penalty. Such a significant penalty means that these foreign banks are highly likely to provide the U.S. government and its agencies like the IRS and the Department of Justice (DOJ) with foreign account information with links to U.S. citizens, permanent residents, and resident aliens.

Indian-Americans Living and Working in the United States: Beware of Undisclosed Foreign Accounts

For Americans holding assets or offshore accounts based in India, this news of an agreement between the nations may raise some alarm. FATCA appears to be a highly effective tool for the U.S. government in convincing or coercing foreign nations and entities to provide tax information. Americans holding or controlling assets or financial accounts in India must disclose these accounts if they have not already done so.

On July 31, 2015, President Barack Obama signed into a law HR 3236 a highway funding bill. Buried in the Bill is a provision which changes the filing date for Foreign Bank Account Reports (FBARs) to April 15th. Up until now the due date for the FBAR, which must be filed electronically on FinCEN Form 114 (formerly TD F 90-22.1) was June 30th. The Bill also provides for an extension of time of up to 6 months to file the FBAR, making the extended due date October 15th. This reconciles the due date for the FBAR with the individual tax return filing date.

Before now many taxpayers were tripped up by the differences in the filing dates. Because many taxpayers go on extension for their tax returns, and don’t have extensive discussions with their CPAs, or other tax preparers, until shortly before the extended deadline of October 15th there were many instances of individuals not realizing they had a filing responsibility until after the June 30th deadline. Those taxpayers were usually stunned to find out that the extension of the filing date for their tax return did not extend the time to file their FBARs. This was a common sense fix to an unnecessary problem.

The Bill also authorizes a first time abate (FTA) procedure of sorts. Specifically the Bill states: “[f]or any taxpayer required to file such [FBAR] Form for the first time any penalty for failure to timely request for, or file, an extension may be waived by the Secretary.” This appears to provide authority to abate an FBAR penalty if the FBAR is filed after April 15th, but before October 15th, if this is the first time the FBAR was due. The language doesn’t really add anything to the law since the IRS already has wide latitude to waive FBAR filing penalties.

On Friday the IRS released new guidance on how examiners should determine the amount of any penalty for the failure to file an FBAR (Report of Foreign Bank Account, FinCEN Form 114). The guidance is effective for all open cases as of May 13, 2015. It does not appear to apply directly to cases in the Offshore Voluntary Disclosure Program (OVDP), but it will impact clients’ decisions as to whether or not to opt-out of OVDP, or whether or not to enter OVDP in the first place.

Under the guidance examiners are instructed to make a determination of willfulness for each year of the examination. If multiple years are involved, and the conduct is willful, the total penalty amount for all years under examination is generally limited to 50 percent of the highest aggregate balance of all unreported foreign financial accounts. However, if the “facts and circumstances” justify it, an examiner may recommend a penalty of more or less than 50 percent, but in no circumstances will the penalty exceed 100% of the highest aggregate balance. Since there have been instances where the IRS has threatened penalties of 150% or more this finally places a limit on the maximum civil penalties. Presumably this was done, in part, to undercut any argument by taxpayers that the penalty violated the Constitutional prohibition against “excessive fines” that was raised in the Zwerner case in Florida. Examiners will continue to coordinate with Fraud Technical Advisors (FTA) if they have reason to believe a criminal referral may be appropriate.

If the examiner determines that the conduct was non-willful then in most cases the penalty will be limited to $10,000 for each year regardless of the number of unreported financial accounts. Previously the IRS position was that it would assert a penalty of $10,000 per year, per account. The guidance does provide that in some cases the “…facts and circumstances (considering the conduct of the person required to file, and the aggregate balance of the unreported foreign financial accounts) may indicate that asserting nonwillful penalties for each year is not warranted.” Examiners may in those cases assert a single penalty not to exceed $10,000 for one year only. The starting point for all nonwillful calculations, however will be the “mitigation guidelines” set forth in IRM 4.26.16.4.6 et. seq.

U.S. citizen, resident aliens and others who are U.S. taxpayers face a unique mode of taxation in the United States. That is, U.S. taxpayers are taxed on their worldwide income regardless of where it was earned. Predictably and understandably, this method of taxation results in many expatriates worrying about whether they will face double taxation – paying taxes on their income to both the nation they are living in and to the IRS. While there are provisions in the U.S. Tax Code, and various tax treaties to address the issue of double-taxation, these provisions can be difficult to understand, create problems for laypersons in ascertaining whether he or she qualifies, and it can present difficulties in maintaining compliance in future tax years as circumstances and finances change. However, the foreign earned income exclusion can be an essential tool in ensuring that an expatriate taxpayer does not face double-taxation and pay more than his or her fair share.

What is the foreign income exclusion?

The foreign earned income exclusion is one way the Tax Code accounts for the problems created by our status-based system of taxation. In general, U.S citizens or permanent legal residents living abroad are eligible to claim the exclusion. The amount of the exclusion is adjusted each year based on the rate of inflation. The amount of the exclusion for current and past tax years is as follows:

Since FATCA’s passage, critics of the law have assailed its provisions and the IRS’ interpretations of the law. However one of the most oft-repeated charges against the account disclosure statute was that the IRS, itself, was not ready for the law and could not handle the influx of data including complex tax filings. A December 2011 New York Times article lamented that the IRS was not prepared for the fierce reaction from overseas or differences in how each tax agency handles their process. For instance, at the time there was concern regarding how manual verification would work in tax systems like Japan’s which relies on electronic screening rather than manual actions.

Thus, foreign financial institutions were originally granted something of a temporary reprieve from FATCA and its obligations. Facing foreign pressure the IRS first delayed the registration deadline for foreign financial institutions until June 30, 2014. Then in May 2014, the IRS announced in Notice 2014-33 that the 2014 and 2015 tax years would be transition period for enforcement and administration purposes relating to entities only. Individual investors are still be required to comply with all FATCA provisions. The transition period does not delay FATCA implementation or effective dates.

However the promise of even greater detection and enforcement powers for the IRS is here. Recently, the IRS announced that its International Data Exchange Service had come online. Increased international FATCA compliance due to lower barriers to reporting should improve the IRS’ foreign account detection efforts.

Nobody wants to file and pay taxes. However, the only thing worse than filing and paying taxes each year may be making a filing mistake that opens one up to an IRS tax audit or a criminal tax prosecution. Many times taxpayers may realize that they made an error on their initial filing. However what the individual does next could determine the consequences he or she may face. If, in a panic, the taxpayer attempts to conceal the error, she may have very well compounded her liability and make the possibility of facing severe tax consequences more likely. However, if the taxpayer discloses the error and corrects it she may be required to pay a relatively small penalty, but that could be the extent of the consequences.

Such was not the case for 46-year-old e-commerce entrepreneur, Gregg Kaminsky, who failed to pay taxes on money held in an undisclosed Swiss account and on income earned from the virtual world known as Second Life.

“I’m not a greedy criminal who set out to break the law”

In the past, having an interest in or signature authority over a foreign financial account did not attract the level of attention and scrutiny that it does today. This is because in the past foreign banking secrecy laws prevented even the disclosure of the identity of the account holder or holders and their links to the United States. Today, this no longer holds true. The IRS and the US government have expended significant resources in promoting and creating international regulatory and reporting regimes. FATCA provides a basis for the mandatory disclosure of certain asset types. Report of Foreign Bank Accounts (FBAR) through the Banking Secrecy Act (BSA) creates a disclosure obligation when the aggregate balance of a foreign financial account or accounts exceed $10,000.

What are the Penalties for Failure to comply with FBAR reporting requirements?

The penalties for failing to comply with FBAR requirements can be particularly harsh regardless of whether the violation is willful or non-willful. If your failure to comply with FBAR is considered non-willful, meaning that it did not involve an intentional or voluntary disregard of a known legal duty, you could face the potential penalty of $10,000 per an undisclosed account for every tax year where the account went unreported. If the violation involves a willful act, including willful blindness, then because there is a six year statute of limitations the penalty can rapidly eclipse the account balance. The penalty for a willful failure to comply with FBAR can result in the penalty of the greater of $100,000 or 50% of the account balance. Consider that if the original account balance was $200,000 a 50% penalty each year over the course of six years would result in the imposition of a penalty of $600,000 – triple the original balance.

At one point, banking secrecy laws in traditional tax havens were considered to provide ample protections in concealing the identity of the account holder. Wealthy individuals, companies, partnerships and a variety of other entities utilized these secrecy laws to open accounts where millions of dollars of otherwise taxable income could be surreptitiously funneled away to a foreign jurisdiction. For decades, this was considered business as usual by some individuals and the continued viability of these tax evasion strategies was not seriously questioned.

That has changed. The law today is clear: US taxpayers must disclose foreign assets of certain types and exceeding certain values or face penalties under FATCA. Furthermore, the failure to disclose certain foreign accounts in a Foreign Bank Account Report (FBAR) can result in additional penalties. The IRS and the US government have expended significant resources in eroding the protections provided by foreign banking secrecy laws. The risks of detection and civil or criminal prosecution has never been greater. In short, aside from being in clear violation of the US Tax Code, the benefits of secret foreign accounts no longer outweigh the risks of detection.

What is FATCA?

FBAR compliance mistakes and failures can be incredibly easy to make, but noncompliance carries harsh and significant financial penalties. In some instances where there is the appearance of fraud or willfulness, your tax matter may be referred to the IRS Criminal Investigation division (CI). Once your matter has been referred to CI, you should seek an experienced tax professional because criminal tax charges are likely to follow.

However, if you take deliberate, well-considered and strategic action before being audited or coming under investigation, you may be able to resolve you past FBAR problems. While there will almost certainly be some penalty associated with disclosing past non-compliance, these penalties are relatively mild in comparison to those that can be levied if civil or criminal tax charges are filed. The Brager Tax Law Group is dedicated to helping hard-working taxpayers resolve their FBAR problems and achieve compliance with the US tax system. The remainder of this post will analyze how FBAR failures can occur and potential solutions.

You did not understand when an FBAR filing is mandatory