If you have foreign financial accounts and you have not yet considered FBAR or feel that the lack of consequences up until this point signal approval or have somehow immunized you from future prosecution, think again. Violations of the filing requirement for Report of foreign Bank and Financial Accounts (FABR) via FinCEN Form 114 can be extremely harsh. An FBAR violation occurs when a US taxpayer who holds an interest in a foreign bank account fails to disclose the account to the government via FinCen Form 114 found on the Banking Secrecy Act E-filing system. What constitutes an interest in a foreign account is interpreted broadly by the IRS. Alternatively, a disclosure obligation can also arise when a taxpayer holds signature authority over a foreign account. When the balance a foreign financial account held by either class of accountholder exceeds $10,000 – even if just few a few hours or days – the legal obligation to disclose that account exists. Failure to disclose the account can result in the possibility of severe civil penalties or a criminal tax prosecution.
A willful violation of FBAR reporting requirements can carry a penalty of the greater of 50% of the foreign account balance or $100,000. A willful violation is one that involves a voluntary or intentional disregard of a known legal duty. Willful blindness is included under this definition of willfulness. To under the severity of a FBAR penalty where willfulness was present, let’s assume that you have a foreign account with a balance of $1 million. Considering the 5 year FBAR look back window a 50% penalty for 5 years would total to a penalty of $2.5 million. Even if the original foreign account balance was substantially reduced to $50,000 then the penalty of $100,000 would be imposed resulting in substantial fines relative to the original account balance. The penalty for a non-willful violation is $10,000 for each violation and for each tax year the account went undisclosed.
However, in many instances, the IRS Offshore Voluntary Disclosure Programs can significantly mitigate the consequences faced by the taxpayer. But, time is of the essence.
If you are under investigation, OVDP is unavailable
OVDP is intended to be a voluntary program. That is, in exchange for coming forward voluntarily and disclosing your foreign accounts, the IRS agrees to impose less severe penalties. Unfortunately many taxpayers take the risk and gamble that they will not be detected. But, the odds are stacked against this strategy and it cannot be recommended. International tax information sharing agreements, new IRS systems and processes, and data leaks by the financial institutions themselves are only a few of the threats to your continued anonymity. In short, the odds are that sooner or later your identity and foreign accounts will be revealed to the IRS. At that point, there is a high probability of criminal prosecution and the reduced penalties provided by OVDP will no longer be an option.
The OVDP Program is Becoming less favorable over time
While the program still represents a significant improvement over the civil and criminal penalties that can otherwise be imposed, the terms of the program are becoming more onerous and the consequences more severe. The 2012 OVDP program imposed a higher penalty rate compared to earlier programs. The 2014 OVDP revisions, likewise, imposed a higher penalty rate and included additional requirements. Changes affecting 2014 OVDP include:
- Applicants must submit all supporting financial statements and documents at the outset. Furthermore, the offshore penalty must be satisfied at the time of application.
- Applicants holding accounts with foreign financial institutions specifically listed on IRS.gov face an increased offshore penalty. Named institutions include HSBC India, Sovereign Management & Legal, and Credit Suisse AG.
- Applicants holding accounts in a foreign financial institution where knowledge of an IRS investigation becomes public prior to pre-clearance face a doubled offshore penalty – 50%.
While the IRS still must maintain the incentive for taxpayers to come forward of their own volition, the reduced favorability of the program may reflect the IRS’ view that taxpayers are or should be familiar with their foreign disclosure obligations requirements. Absent indications otherwise, this pattern can only be expected to continue, potentially making further delay even more costly.
The Hoffman Tax Law Office fights to resolve tax issues. We advocate and negotiate on your behalf to resolve tax problems such as FBAR violations because of undisclosed foreign accounts. To discuss your OVDP, FBAR or other tax concerns, contact the Hoffman Tax Law online or by calling (800) 897-3915.