Do I need to participate in the IRS Offshore Voluntary Disclosure Program? Can I just do a quiet disclosure by amending my returns and filing the right forms from now?
Intimidated by the lengthy disclosure process and shocked by the 27.5% civil penalty that applies under the Offshore Voluntary Disclosure Program, taxpayers often ask whether it is advisable to just correct their filings moving forward or to just go back and correct their filings without entering into the program. Though there are some circumstances under which entering into the program may not be in your best interests, generally, these alternatives are more risky than entering into the program. Amending your returns and foreign information reporting form filings essentially requires you to do all the work necessary under the program, without any of the guarantees available under the program.
Because the IRS has carefully created a program with processes designed to assist taxpayers in correcting the filings related to foreign accounts, choosing to disregard these instructions and establish your own method of compliance could be viewed by the IRS as negligent, or worse, fraudulent behavior. As such, any opportunity to mitigate penalties would be lost due to a lack of good faith.
Of course, the need to mitigate penalties would only arise if the IRS “catches” you and decides to assess penalties. The IRS has six years to assess penalties for failure to file an FBAR form and up to six years to assess additional tax and penalties for failure to report taxable income. Six years is a long time to wait and see whether the IRS will catch their non-compliance and decide to assess penalties.
How long does the Offshore Voluntary Disclosure Program take?
The voluntary disclosure process takes 12-14 months, depending on various factors, including how quickly documents are provided to the IRS, the workload of the IRS Revenue Agent who is assigned to your case, and, in some instances, the complexity of your case. Depending on your situation, it may be advisable to draw the process out a little bit longer to see how the IRS is treating taxpayers with facts similar to yours. In other cases, it is best to turn in documents as quickly as possible and get it all over with.
If, after receiving closing documents in your disclosure case, you decide to opt-out of the civil penalty structure and request a waiver of penalties due to reasonable cause, you can expect another 6-9 months before your case concludes. Factors that affect how much time the opt-out process takes include the complexity of your returns as originally filed, the workload and level of experience of the IRS Revenue Agent assigned to your opt-out, and the speed with which you respond to requests for additional documents or information.
Generally, the IRS has been allocating more of its resources to this program, and our clients have seen a slight decrease in the processing times for certain stages of the disclosure program.
Is my foreign social security account, foreign pension (such as a superannuation account), or foreign retirement account taxable? Do I have to report it to the IRS?
Many people believe that a retirement plan they have in a foreign country is not subject to reporting because it is similar to a U.S. 401(k) or because it is not taxed in the foreign country where it is located. This is rarely the case. In fact, though most tax treaties between the U.S. and other countries do provide relief from double taxation through foreign tax credits or foreign income exclusions, this relief does not release the taxpayer from reporting the existence of and income from the account. The fact remains that U.S. taxpayers must report their worldwide income to the IRS, regardless of where they live or from where the money came.
U.S. tax laws are complex enough on their own. Once you start adding in the impact of tax treaties and other intergovernmental agreements such as FATCA, it is impossible to make an across-the-board statement regarding what types of accounts need to be reported and whether the income from those accounts will be taxable. It is best to find information specific to your situation and determine your compliance strategy from there.
If my foreign bank account did not earn any interest or dividends, do I still have to report it to the IRS and participate in the Offshore Voluntary Disclosure Program?
If there is no income associated with your foreign account, or you have otherwise properly reported all of the related taxable income, you do not need to enter into the IRS Offshore Voluntary Disclosure Program for failure to file the FBAR form. Per FAQ 17 on the IRS website, 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.
You should however, make immediate efforts to file delinquent FBARs and any other foreign account information reporting forms, such as Form 8938, Statement of Specified Foreign Financial Assets, Form 3520, Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts, or Form 5471, Information Return of U.S. Persons with Respect to Certain Foreign Corporations. To avoid further inquiry by the IRS, it is advisable to file these delinquent forms with a letter explaining why the forms are late and describing the relevant facts particular to your situation.
What if I cannot get account statements from my foreign bank to get the information I need for the required Offshore Voluntary Disclosure documents?
Because of the Foreign Account Tax Compliance Act (FATCA), foreign financial institutions are becoming more amenable to providing whatever taxpayers need to complete an IRS Offshore Voluntary Disclosure. However, sometimes, when an account was closed many years ago, or the bank at which the account was held is a small, local financial institution, the records are just not available. In this case, it is important to come up with a reasonable way to compute the income from and balance in the account based on the information you do have. If there is a reasonable basis for your computations, the IRS will generally accept your submission without source documents for every year at issue. However, if your basis is unreasonable or seems to be contrived in a way to create a lower tax liability, this will be viewed unfavorably by the IRS, resulting in a higher tax liability, and possibly being kicked out of the disclosure program.
With this in mind, it is important to ask your foreign financial institution, not just for account statements, but for detailed transaction statements. For foreign brokerage or investment accounts with capital gains, detailed transaction statements provide cost basis and expense information that is crucial in determining the correct tax liability.
What do I need to start the Offshore Voluntary Disclosure Program process?
There is a span of about six months between the time pre-clearance is requested and the time that amended returns and account statements must be submitted. The account information needed to complete the first two steps of the disclosure program is minimal and can be amended if it is later found to be incorrect. If the deadline to provide amended returns and account statements is approaching and you still do not have everything you need to complete the submission, an extension can be requested. To submit the pre-clearance request, all you need is your social security number, address, and birthdate.
What do I do if I got a letter from my foreign bank asking my permission to disclose my information to the IRS and the Department of Justice?
In response to FATCA and the severe penalties that have been imposed on Swiss banks for the assistance they gave to U.S. taxpayers in hiding funds offshore, many foreign financial institutions are contacting their U.S.-based clientele and asking them to provide either: 1) Proof that they have properly reported the account to the IRS; 2) Proof that they are participating in the Offshore Voluntary Disclosure Program; or 3) Permission to disclose the account holder’s information to the IRS. If you do not reply, your information will almost certainly be turned over to either the U.S. Department of Justice or the IRS. On the bright side, however, banks in this situation are likely to be eager to provide the account information needed to complete the disclosure and will therefore respond more quickly to requests for account documents.
Though it remains to be seen what the U.S. government will do with the wealth of information it is about to receive from multiple foreign financial institutions, the IRS has clearly stated that it will not accept a taxpayer into the disclosure program if they already have information about that taxpayer’s foreign accounts from the foreign financial institution.
We can submit an Offshore Voluntary Disclosure Program pre-clearance request on your behalf and provide your bank with proof of this within a 24-48 hour period.
If I just found out about a foreign account in my name, do I still have to enter into the Offshore Voluntary Disclosure Program?
In short, yes. Though not knowing about an account is good reason for never having reported it, this is a fact that will weigh in your favor should you decide to request a waiver of penalties due to reasonable cause. It is not a fact that relieves you of your filing and reporting obligations. Furthermore, the IRS does offer a reduced 5% penalty in certain situations in which the taxpayer did not open the account at issue or cause it to be opened. More information about this reduced penalty can be found at FAQ 52on the IRS website.
I told my tax preparer about my foreign account and he said I did not have to do anything. If my tax preparer gave me the wrong advice, can I be held accountable?
Though FBAR filing requirements have been around since 1972, many experienced and knowledgeable tax professionals had never even heard of the FBAR before the IRS initiated its first Offshore Voluntary Disclosure Program back in 2009. As such, even taxpayers who have been paying competent tax professionals to prepare their returns for years on end may find themselves in unexpected trouble.
Unfortunately, taxpayers are expected to thoroughly review their tax returns, and they are signed under penalties of perjury. The case law surrounding whether reliance on a tax professional relieves the taxpayer of liability is multifaceted and considers many different factors. Ultimately, though you can be held accountable for your tax preparer’s mistakes, the fact that you used a tax professional demonstrates a level of business care and prudence that can significantly impact the analysis.
An important distinction here is whether you actually told your tax preparer about the account or not. A lot of taxpayers did not tell their tax preparers about their foreign account because they did not think they needed to. They did not know that their foreign account had anything to do with their U.S. tax filing and reporting requirements. In this situation, a reduction or waiver of penalties may be possible, but will require a more in-depth legal analysis of the developing law and how it applies to your situation.
What if the IRS won’t accept me into the Offshore Voluntary Disclosure Program?
So far, we have not had any clients denied pre-clearance into the IRS Offshore Voluntary Disclosure Program. We have had a number of clients who have decided to forego final acceptance into the program by choosing to opt-out of the civil penalty structure and request a waiver of penalties. The IRS has stated that taxpayers whose information has already been disclosed to the IRS by a third party will not be allowed to participate in the program, however, even with the voluminous amounts of information coming to the U.S. from Swiss banks, we have yet to see a taxpayer denied pre-clearance. Given the IRS’s stated policy on this issue, however, it is advisable to begin your disclosure sooner rather than later.
When do I have to decide whether I want to opt-out of the Offshore Voluntary Disclosure Program or pay the 27.5% penalty?
This decision does not have to be made until approximately 12-14 months after you begin the disclosure process. After the IRS reviews your disclosure submission, they will generate a Form 906, Closing Agreement, that details the resulting tax liability and the penalty that you would be required to pay to complete acceptance into the program. At that time, you can inform the IRS that you will not sign the closing agreement and that you will instead request a waiver or reduction of any applicable penalties by opting-out of the civil penalty structure available under the Offshore Voluntary Disclosure Program.