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Foreign Bank Accounts & FBAR Penalties

 

Abajian Law’s Track Record With Foreign Bank Accounts & FBAR Penalties

Mr. Abajian represents dozens of taxpayers who are voluntarily disclosing to the IRS over $250 million in off-shore bank accounts, assets and related income tax liabilities. Mr. Abajian also represents a number of taxpayers who are being criminally investigated by the Department of Justice for failure to report foreign bank accounts and income earned on those accounts. He also represents several clients in sensitive civil audits before the IRS that involve offshore bank accounts and assets.

 

The Importance of Experience

An unwarranted FBAR voluntary disclosure can be as costly a mistake as a mishandled disclosure. Clients have options when understanding their obligations to the government concerning their foreign properties. At Abajian Law, we have dealt with a variety of circumstances from clients with innocent inheritances they were unaware of to clients facing harsh criminal sanctions for flagrant and willful violations of the law. As many satisfied clients can attest, we believe we have perfected the complexities and intricacies of getting into compliance with the government. We can help you rest easy again and help you repatriate your foreign properties to utilize the vast opportunities in the modern business climate.

For clients already under investigation for unreported foreign income and facing possible criminal prosecution, Abajian Law can provide top-notch representation as we navigate the delicate process of a criminal investigation or prosecution. If you are in this situation, contact our office and speak to a Los Angeles FBAR tax attorney as soon as possible.

 

Please review the following 2014 OVDP FAQs for more information:

What is an FBAR?

An FBAR is a form called a Report of Foreign Bank and Financial Accounts. The form number is TD F 90-22.1. It is used to disclose offshore bank accounts to the IRS.

If you have a financial interest in or signature authority over a foreign financial account, including a bank account, brokerage account, mutual fund, trust, or other type of foreign financial account, exceeding certain thresholds, the Bank Secrecy Act may require you to report the account yearly to the Department of Treasury by electronically filing a Financial Crimes Enforcement Network (FinCEN) 114. This form super, Report of Foreign Bank and Financial Accounts (FBAR). FinCen Report 114 supersedes the previous years’ form TD F 90-22.1 (the old FBAR).

Do I need to file an FBAR?

If you are a United States person who has a financial interest in or signature authority or other authority over any financial account in a foreign country and if all your accounts combined exceed $10,000 at any time during the calendar year then you must file an FBAR.

What is United States Person?

A “United States Person” includes a citizen OR resident of the United States, a domestic partnership, a domestic corporation, and a domestic estate or trust.

Note that even a single member LLC which is disregarded for tax purposes, is still obligated to file FBARs because FBARs are required under Title 31 and not any provision of the internal revenue code.

Who is a resident of the United States?

For many of our clients, this question is the most relevant one. If a person is a United States citizen or entity, it’s pretty clear that they are under the obligation to file an FBAR. Most confusion occurs when a foreign person spends time in the United States.

There are two tests to determine if someone is considered a US resident.

1. You become a permanent United States resident with lawful authority to live and work in the United States. This test is satisfied if you were legally issued a green card and obtained the immigration status of a permanent resident of the United States. It is commonly known as the green card test. The FBAR requirement will begin in the calendar year you become a United States resident and will continue until the status has been rescinded or administratively or judicially determined to have been abandoned.

2. The second test is the substantial presence test. To meet the substantial presence test, you must have been physically present in the U.S. at least 31 days during the current year, and 183 days during the 3 year period that includes the current year and the 2 years immediately before. To satisfy the 183 days requirement, count all of the days you were present in the current year, and one-third of the days you were present in the first year before the current year, and one-sixth of the days you were present in the second year before the current year.

Can I get an extension on filing the FBAR?

NO. The June 30th deadline is crucial. You must file the FBAR by June 30. However, FinCEN Notice 2014-1 extended the due date for filing FBARs by certain individuals with signature authority over, but no financial interest in, foreign financial accounts of their employer or a closely related entity, to June 30, 2016.

I should have filed an FBAR in a previous year, but have failed to do so. What now? Can I do nothing?

If you do nothing, you run the risk of civil and criminal penalties outlined below. Also you can be subject to more penalties in future years. Keep in mind that foreign banks will be turning over information under the Foreign Account Tax Compliance Act (FATCA) and Foreign Financial Asset Reporting requirements.

In addition, an insider at the bank your foreign account is in can disclose information to the IRS under the whistleblower statutes in an attempt to collect a reward, a former bank employee named Bradley Birkenfeld received 104 million dollars for disclosing information on clients with foreign accounts. We have also witnessed instances where a separated spouse or disgruntled employee reveals information about a foreign bank account and thereby exposing a related taxpayer’s obligation.

Can I just close my foreign bank account and forget about it?

No. That will help you in future years but won’t correct the violations that took place in prior years and will still leave you open to civil and criminal penalties for the years in which a violation occurred. Also, this approach may be deemed by the IRS as an additional affirmative bad act on the part of a taxpayer to gain use of the money or hide the existence of the account. Some clients ask, can’t I just wire the money back to the U.S.? You can but the Office of Foreign Asset Control monitors wire transfers, especially larger ones. We have seen clients receive letters from that office asking them to explain the wire transfers. Again, this method carries lots of risk.

Can I just do a “silent disclosure” of my offshore bank accounts?

Several CPAs and others that are not experienced in dealing with the IRS on offshore matters are simply advising clients to file amended returns and FBARs. The IRS has specifically stated that they are aware that some taxpayers have attempted so-called “quiet” disclosures by filing amended returns and paying any related tax and interest for previously unreported offshore income without otherwise notifying the IRS. The IRS is actively monitoring amended returns that are reporting offshore income. Those taxpayers run the risk of being examined and sometimes even criminally prosecuted. In fact, the IRS recently criminally prosecuted a taxpayer who attempted a silent disclosure of an offshore account that had a surprisingly small balance.

The IRS has specifically stated the following: The IRS is reviewing amended returns and could select any amended return for examination. The IRS has identified, and will continue to identify, amended tax returns reporting increases in income. The IRS will closely review these returns to determine whether enforcement action is appropriate. If a return is selected for examination, the 27.5 percent offshore penalty would not be available. Simply put, the days of the “quiet” disclosures are long gone. If a taxpayer has already submitted a quiet disclosure, they may want to consider coming into compliance under the 2014 OVDP or the Streamlined Filing Compliance Procedures depending on their specific facts and whether the failure to file was willful or non-willful.

I earned this money before I had any contact with the United States and I had no idea there was an FBAR requirement, isn’t this unfair?

In many cases a very detailed review of the facts is necessary to determine the best course of action. In cases similar to the above mentioned facts, opting out should be an option that is considered in detail. Also, it is possible to meet one of the exceptions to the 27.5% penalty or consider the Streamlined Filing Compliance Procedure if the failure to file was non-willful. A non-willful actor may also consider opting out of an OVDP program they have entered into. The distinction between willful and non-willful failures to file FBARs is dependent on a variety of factors. This inquiry should be made with a seasoned tax professional who understands such matters.

What is the penalty if the IRS catches me first?

Generally, the civil penalty for willfully failing to file an FBAR can be as high as the greater of $100,000 or 50 percent of the total balance of the foreign account per violation. See 31 U.S.C. § 5321(a)(5).

Non-willful violations that the IRS determines were not due to reasonable cause are subject to a penalty of up to $10,000 per violation.

Furthermore, there could be fraud penalties of 75% of the tax owed or 20% accuracy related penalties.

Beginning with the 2011 tax year, a penalty for failing to file Form 8938 reporting the taxpayer’s interest in certain foreign financial assets, including financial accounts, certain foreign securities and interests in foreign entities, as required by I.R.C. §6038D. A penalty for failing to file Form 3520, Annual Return to Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts if applicable. A penalty for failing to file Form 3520-A, Information Return of Foreign Trust With a U.S. Owner if applicable among a few other odd ball penalties.

What is the criminal penalty if the IRS catches me first; they won’t really criminally prosecute everyone, will they?

Possible criminal charges related to tax returns include tax evasion (26 U.S.C. § 7201), filing a false return (26 U.S.C. § 7206(1)). Willfully failing to file an FBAR and willfully filing a false FBAR are both violations that are subject to criminal penalties under 31 U.S.C. § 5322.

A person convicted of tax evasion is subject to a prison term of up to five years and a fine of up to $250,000. Filing a false return subjects a person to a prison term of up to three years and a fine of up to $250,000. Failing to file an FBAR subjects a person to a prison term of up to ten years and criminal penalties of up to $500,000.

We have seen the IRS aggressively pursue all types of cases, even those with very small balances.

I want to be in compliance, can I come clean to the IRS? How can I accomplish this?

Currently, the IRS is offering opportunities for US taxpayers to come clean about their offshore accounts and take advantage of reduced penalties than can be significantly less than what taxpayers would be subject to if the IRS were to find out about their accounts first. The latest revised program for a taxpayer to come into compliance regarding a willfully undisclosed foreign account is commonly referred to as the 2014 OVDP. If a taxpayer’s failure to timely file an FBAR is non-willful, then the taxpayer should consider the Streamlined Filing Compliance Procedures which carry a much lower 5% penalty on the aggregate balance of all foreign accounts at year’s end as opposed to a 27.5% penalty on the aggregate value of OVDP assets during the period covered by the FBAR voluntary disclosure.

What is the 2014 Offshore Voluntary Disclosure Program (2014 OVDP)?

In a nutshell, it is the answer for a willful non-filer to come into compliance and disclose their foreign assets that should have been reported to the IRS. In general, you first must be granted preliminary acceptance by the IRS criminal group then you file amended returns for the past 8 years reporting any unreported income and pay a flat penalty of 27.5% of the year with the highest total balance in all of your OVDP assets which could include the value of your bank accounts and sometimes even other assets such as income producing foreign property. However, any taxpayer who has an undisclosed foreign financial account will be subject to a 50% miscellaneous offshore penalty if, at the time of submitting the preclearance letter to IRS Criminal Investigation: an event has already occurred that constitutes a public disclosure. As of December 30, 2014 there are twelve banks that have publicly disclosed accounts. Again, the penalty for these taxpayers is 50% instead of 27.5%.

What are the requirements of the Offshore Voluntary Disclosure Program?

1. Provide copies of previously filed original (and, if applicable, previously filed amended) federal income tax returns for tax years covered by the voluntary disclosure.

2. Provide complete and accurate amended federal income tax returns (for individuals, Form 1040X, or original Form 1040 if delinquent) for all tax years covered by the voluntary disclosure, with applicable schedules detailing the amount and type of previously unreported income from the account or entity (e.g., Schedule B for interest and dividends, Schedule D for capital gains and losses, Schedule E for income from partnerships, S corporations, estates or trusts and, for years after 2010, Form 8938, Statement of Specified Foreign Financial Assets).

3. File complete and accurate original or amended offshore-related information returns and FinCen 114 (Report of Foreign Bank and Financial Accounts, commonly known as an “FBAR”) for tax years covered by the voluntary disclosure.

4. Cooperate in the voluntary disclosure process, including providing information on offshore financial accounts, institutions and facilitators, and signing agreements to extend the period of time for assessing Title 26 liabilities and FBAR penalties.

5. Pay 20% accuracy-related penalties under IRC § 6662(a) on the full amount of your offshore-related underpayments of tax for all years. Other penalties may apply for domestic underpayments as well since domestic underpayments must be disclosed as well when submitting an Offshore Voluntary Disclosure under this program.

6. Pay failure to file penalties under IRC § 6651(a)(1) and/or 6651(a)(2), if applicable.

7. Pay, in lieu of all other penalties that may apply to your undisclosed foreign assets and entities, including FBAR and offshore-related information return penalties and tax liabilities for years prior to the voluntary disclosure period, a miscellaneous Title 26 offshore penalty, equal to 27.5% of the highest aggregate balance in foreign bank accounts/entities or value of foreign assets during the period covered by the voluntary disclosure.

8. Submit full payment of any Title 26 tax liabilities for years included in the offshore disclosure period and all tax, interest, accuracy-related penalties for underpayments related to offshore accounts and entities, and, if applicable, the failure to file and failure to pay penalties with the required to certain submissions or make good faith arrangements with the IRS to pay in full, the tax, interest, and these penalties.

9. Execute a Closing Agreement on Final Determination Covering Specific Matters, Form 906.

10. Agree to cooperate with IRS offshore enforcement efforts by providing information about offshore financial institutions, offshore service providers, and other facilitators, if requested.

11. Provide certain other information if the taxpayer has a Canadian registered retirement savings plan (RRSP) or registered retirement income fund (RRIF), did not make a timely election pursuant to Article XVIII(7) of the U.S. – Canada income tax treaty to defer U.S. income tax on income earned by the RRSP or RRIF that has not been distributed, and would now like to make an election.

What’s an example of when a taxpayer comes forward under the Offshore Voluntary Disclosure Program versus when a taxpayer doesn’t come forward under the 2014 OVDP and gets caught by the IRS?

For example, assuming $1,000,000 was in a foreign account before 2004 and was not unreported income in 2004 and started earning interest in 2004. The taxpayer discloses in 2012

YearAmount on DepositInterest IncomeAccount Balance
2004$1,000,000$50,000$1,050,000
2005$50,000$1,100,000
2006$50,000$1,150,000
2007$50,000$1,200,000
2008$50,000$1,250,000
2009$50,000$1,300,000
2010$50,000$1,350,000
2011$50,000$1,400,000

(NOTE: This example does not provide for compounded interest, and assumes the taxpayer is in the 35-percent tax bracket, does not have an investment in a Passive Foreign Investment Company (PFIC), files a return but does not include the foreign account or the interest income on the return, and the maximum applicable penalties are imposed.)

If the taxpayer in the above example came forward and their voluntary disclosure is accepted by the IRS, they face this potential scenario:

They would pay $518,000 plus interest. This includes:

  • Tax of $140,000 (8 years at $17,500) plus interest,
  • An accuracy-related penalty of $28,000 (i.e., $140,000 x 20%), and
  • An additional penalty, in lieu of the FBAR and other potential penalties that may apply, of $385,000 (i.e., $1,400,000 x 27.5%).

If the taxpayer didn’t come forward, when the IRS discovered their offshore activities, they would face up to $4,543,000 in tax, accuracy-related penalty, and FBAR penalty. The taxpayers would also be liable for interest and possibly additional penalties, and an examination could lead to criminal prosecution.

The civil liabilities outside the Offshore Voluntary Disclosure Program potentially include:

  • The tax, accuracy-related penalties, and, if applicable, the failure to file and failure to pay penalties, plus interest, as described above,
  • FBAR penalties totaling up to $3,825,000 for willful failures to file complete and correct FBARs (2005 – $575,000, 2006 – $600,000, 2007 – $625,000, 2008 – $650,000, and 2009 – $675,000, and 2010 – $700,000),
  • The potential of having the fraud penalty (75 percent) apply, and
  • The potential of substantial additional information return penalties if the foreign account or assets is held through a foreign entity such as a trust or corporation and required information returns were not filed.

Note that if the foreign activity started before 2004, the Service may examine tax years prior to 2004 if the taxpayer is not part of the OVDP but will agree to 8 years of examination forgiving prior years if the taxpayer joins the OVDP.

In reality, the client would face up to $4,543,000 in tax, but these figures are often plead down to lesser amounts, however these lesser amounts are still usually multiples of the tax that would be owed when joining the voluntary disclosure.

What years are included in the OVDP disclosure period?

For calendar year taxpayers the voluntary disclosure period is the most recent eight tax years for which the due date has already passed. The eight year period does not include current years for which there has not yet been non-compliance. If you disclose in 2015, you will have to include years 2007 through 2014.

Can I make a voluntary disclosure if the IRS has made a “John Doe” summons seeking information that can potentially implicate me specifically?

Yes, as long as the IRS has not obtained evidence of your specific noncompliance with the tax laws or Title 31 reporting requirements you are still eligible for the program. However, once the IRS obtains evidence of a specific taxpayer’s noncompliance with the tax laws or Title 31 reporting requirements, the taxpayer is ineligible for the program. Therefore it is especially important to voluntarily disclose if you have reason to believe an entity you have a foreign account with has been issued a John Doe Summons.

Can I make a voluntary disclosure if I’m being audited (or examined)?

No. If the IRS has initiated a civil examination, even if it doesn’t relate to undisclosed foreign accounts or undisclosed foreign entities, the taxpayer will not be eligible to come in under the OVDP. Taxpayers under criminal investigation by CI are also ineligible. The taxpayer or the taxpayer’s representative should discuss the offshore accounts with the agent.

What if I reported income on all my foreign accounts and entities, but didn’t realize I had an obligation to file FBARs?

In this case you can just file late FBARs with the IRS along with a reasonable cause explanation and should not be subject to penalties or criminal prosecution.

The IRS will not impose a penalty for the failure to file the delinquent FBARs if there are no underreported tax liabilities and you have not previously been contacted regarding an income tax examination or a request for delinquent returns.

Should I ever opt out of the OVDP?

For some, opting out of the OVDP may be a risk worth taking. Although the jurisprudence defining willfulness in failing to file an FBAR is scarce, there are some sets of circumstances where this option could be considered. However, the decision is very fact specific and should be discussed at length prior to opting out. The risks are significant and should be weighed accordingly.

What are the next steps?

Our OVDP tax attorney, Mr. Abajian would like to meet you in a face-to-face consultation if possible (or on the telephone) where he will discuss your case and options in detail since each case hinges on the details. Also, he can generally provide a flat fee for his service or at least an estimated range.

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