December 23, 2022
Correcting Offshore Account Disclosure Violations—Should You Submit a Streamlined Filing or Voluntary Disclosure in 2023?
U.S. taxpayers who own offshore accounts and certain other foreign financial assets have an obligation to disclose these assets to the Internal Revenue Service (IRS)—provided that their value exceeds the IRS’ relatively modest reporting thresholds. Depending on the nature of a taxpayer’s foreign financial assets, this may entail two separate filings: (i) filing Form 8938 under the Foreign Account Tax Compliance Act (FATCA); and (ii) filing a Report of Foreign Bank and Financial Accounts (FBAR) under the Bank Secrecy Act (BSA).
Non-compliance with FATCA and the BSA can trigger significant penalties. This includes criminal penalties in some cases. For taxpayers who have failed to meet their FATCA and/or FBAR filing obligations, remedying the violation proactively is typically the best way to mitigate the penalties they have to pay.
When Is Offshore Account Disclosure Required?
Before we discuss the options for remedying offshore account disclosure violations, we should first cover when offshore account disclosures are required under FATCA and the BSA. While taxpayers’ obligations under these laws overlap to an extent, taxpayers who own offshore accounts do not necessarily need to file Form 8938 and an FBAR in all cases.
When is FATCA Compliance Required?
Under FATCA, U.S. taxpayers residing domestically and abroad must disclose their “foreign financial assets” that exceed the applicable reporting threshold. Foreign financial assets include offshore accounts as well as securities, ownership interests in foreign entities, foreign financial instruments and other foreign assets held for investment purposes. The reporting thresholds under FATCA are as follows:
- For taxpayers living in the U.S., more than $50,000 on the last day of the tax year or more than $75,000 at any time during the year (these thresholds double for married couples filing jointly).
- For taxpayers living abroad, more than $100,000 on the last day of the tax year or more than $150,000 at any time during the year (also doubled for married couples filing jointly).
When is FBAR Compliance Required?
In contrast to FACTA, the FBAR filing requirement under the BSA applies exclusively to “foreign financial accounts” (i.e., offshore bank accounts). Under the BSA, the reporting thresholds are the same for all taxpayers. Taxpayers who hold offshore accounts must file an FBAR if the aggregate value of their accounts exceeds $10,000 at any time during the relevant calendar year.
Should You Submit a Streamlined Filing or Voluntary Disclosure in 2023?
Let’s say you were required to file Form 8938 or an FBAR (or both) in relation to your offshore accounts, and you failed to do so. What should you do now?
The IRS gives taxpayers two main options for remedying offshore account disclosure violations, each of which is available under different circumstances. These two options are: (i) submit a streamlined filing to the IRS; or (ii) submit a voluntary disclosure to IRS Criminal Investigation (IRS CI).
1. Submitting a Streamlined Filing to the IRS
The IRS’ Streamlined Filing Compliance Procedures provide a way for U.S. taxpayers to remedy non-willful violations of the offshore account disclosure requirements. As the IRS explains, “[t]he streamlined filing compliance procedures . . . are available to taxpayers certifying that their 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.”
As the IRS further explains, “[n]on-willful conduct is conduct that is due to negligence, inadvertence, or mistake or conduct that is the result of a good faith misunderstanding of the requirements of the law.”
While non-willfulness is a key eligibility requirement for submitting a streamlined filing to correct an offshore account disclosure violation, it is not the only requirement that applies. To be eligible to submit a streamlined filing, a taxpayer must also:
- Have a Social Security Number or other valid Taxpayer Identification Number (TIN);
- Not currently be subject to an IRS audit, examination or criminal investigation, regardless of whether the audit or examination relates to the taxpayer’s offshore holdings; and,
- Not currently owe any penalties to the IRS.
Crucially, submitting a streamlined filing does not guarantee protection. Among other potential concerns, if the IRS disputes a taxpayer’s certification of non-willfulness, it can pursue civil or criminal enforcement action based, in part, on the information included in the taxpayer’s streamlined filing. As a result, taxpayers who are considering a streamlined filing in 2023 are strongly advised to consult with their tax counsel prior to providing any information about their offshore account disclosure violations to the IRS.
2. Submitting a Voluntary Disclosure to IRS CI
While utilizing the IRS’ Streamlined Filing Compliance Procedures is only an option for taxpayers who can make the requisite certification of non-willfulness, submitting a voluntary disclosure to IRS CI is only an option for those who are prepared to acknowledge that they have willfully violated the law. Thus, submitting a voluntary disclosure presents risks as well, and, as the IRS notes, “[a] voluntary disclosure will not automatically guarantee immunity from prosecution.”
But, successfully submitting a voluntary disclosure can “result in prosecution not being recommended,” and this can be significant for taxpayers who are at risk of facing criminal charges as a result of their failure to file. As a result, it is an option worth considering in appropriate circumstances—though, here too, it is imperative to have experienced legal representation.
Similar to the IRS’ Streamlined Filing Compliance Procedures, IRS CI’s Voluntary Disclosure Practice establishes several eligibility criteria. These criteria include:
- IRS CI must not have already received information about the violation from another source (i.e., a foreign bank);
- The taxpayer must not currently be subject to a civil examination or criminal information; and,
- The taxpayer must cooperate with IRS CI and make good-faith arrangements to pay all taxes, penalties and interest owed.
Contact Us for More Information
If you need to know more about your options for correcting an offshore account disclosure violation, we encourage you to contact us promptly. To speak with an experienced tax attorney at Brown Tax, P.C. in confidence, call 888-870-0025 or request an appointment online today.