FOREIGN FINANCIAL ACCOUNTS FBAR AND INCOME TAX FILING REQUIREMENTS

U.S. citizens living at home or abroad with unreported foreign financial accounts and/or unreported foreign income on Forms 1040 have much to be concerned about.  So do resident aliens in the U.S. with “back home” accounts.  The reach of foreign account issues also includes U.S. citizens and resident aliens who have, as employees or business owners, foreign account check writing responsibilities.

The government, in recent years, has taken significant steps to identify and penalize taxpayer failures to report foreign accounts and taxable foreign income for U.S. citizens living at home and abroad.

There have been Department of Justice victories in U.S. District Courts, FACTA (The Foreign Account Tax Compliance Act) legislation and regulations, as well as the transfer of collection authority on foreign compliance matters from the Treasury Department to the Internal Revenue Service including the requirement of filing Form 8938 attached to Form 1040 (see page 10).  Also see page 5 for the attractive new Streamlined Voluntary Disclosure Program in effect since July of 2014.

Developments include:

  • Federal legislation and treaties obligating foreign financial institutions to provide the Treasury Department with information concerning U.S. residents with foreign accounts.
  • Introducing foreign asset reporting requirements on individual returns (on Forms 1040/8938) beyond the requirements to file Foreign Bank and Financial Reports (FBAR reports now referred to as FinCEN reports).  In addition to FBAR penalties, taxpayers face penalties for failure to file income tax Form 8938 foreign account disclosures.  Schedule B “check the box” language also reflects clarified wording on foreign accounts totaling $10,000 or more.
  • Encouraging taxpayers who choose to participate in the IRS Offshore Voluntary Disclosure Program (OVDP) to provide information about international tax avoidance schemes promoted by advisors and foreign institutions.
  • Successful criminal prosecution of FBAR offenders.
  • Successful U.S. District Court civil litigation to collect FBAR civil penalties from noncompliant taxpayers; these taxpayers have usually been subject to criminal sanctions such as evasion for non-reporting of foreign taxable income.  The Department of Justice is now using subpoenas directed to account holders to obtain foreign financial records.
  • Transferring much of the compliance and collection authority from the Department of Treasury to the Internal Revenue Service.  This allows the Internal Revenue Service, in civil and criminal cases, to issue summonses, assess penalties and collect income tax and penalties without the prior approval of federal courts.  Court approval is required for government collection actions in FBAR penalty cases.
  • Continuing amnesty initiatives through a long standing Offshore Voluntary Disclosure Program (OVDP) to allow taxpayers to avoid criminal prosecution through disclosure of foreign accounts and foreign taxable income.  A nuts and bolts 39 page question and answer on the Offshore Voluntary Disclosure Program (OVDP) is available from the IRS at their website relating to their Voluntary Disclosure Program.
  • Alternative streamlined Offshore Voluntary Disclosure Procedures effective after July 1, 2014 allowing U.S. citizens domiciled both at home and abroad to enter the program with penalties either abated or significantly reduced to a 5% FBAR penalty (good faith misunderstanding of the law is the threshold requirement for streamlined programs).
  • Initiatives have resulted in over 1,100,000 FBAR filings through 2015 (IR-2016-42).  Under OVDP programs there have been 45,000 filings and $6.5 billion in revenue collected.
  • While continuing changes are directed toward criminal/fraudulent taxpayer non-compliance, the rules impact non-willful and inadvertent compliance failures of a large group of taxpayers.  We see immigrant taxpayers as well as U.S. citizens living and working aboard with a little understanding of foreign account compliance problems.
  • If a taxpayer had previously paid all relevant income tax on foreign taxable income, there will be no FBAR penalties.  A quiet FBAR disclosure is appropriate.
  • Occasional use of Circular 230 sanctions against tax professionals who do not advise clients of the consequences of non-filing FBAR’s.
  • Passports are now subject to revocation or denial if tax obligations are not satisfied.

WHAT ARE THE BASIC ACCOUNT AND INCOME DISCLOSURE RULES?

Highlights of the rules are as follows:

Who must file an FBAR?  U.S. persons, including U.S. citizens, resident aliens, trusts and domestic entities that have an “interest” in foreign financial accounts that meet the reporting threshold of $10,000.  This refers to total account values – not for each separate account.  An “interest” includes an individual taxpayer who has signature authority or other financial authority over a foreign account.  A “U.S. person” for FBAR purposes includes corporations, partnerships, trusts and limited liability companies – but not decedent’s estates.  Note that individual business owners, officers and employees are responsible for filing FinCEN reports if they have signature authority on business accounts.   Regulated business entities have multiple exemption avenues. Non owner “responsible” employees can file FBAR’s without penalty;  caveat, however, if the responsible officers have a financial interest in the foreign account.

What are foreign financial accounts?  Covered assets include foreign bank and brokerage accounts, offshore mutual funds, foreign trusts, foreign life insurance and annuity policies as well as retirement plans with an overseas situs.  Excluded are foreign government sponsored Social Security-like accounts and personally held off-shore real estate.

What are the penalties?  Willful failure to file an FBAR can mean a civil penalty of 50% of the total balance of foreign accounts in a given year.  31 U.S.C. § 5321(a)(5).  You are referred to the schedule of possible lesser FBAR civil penalties through voluntary disclosure discussed later in this website.

What about individual income taxes?  U.S. citizens, both resident and abroad, as well as U.S. resident aliens are responsible for reporting worldwide income on their income tax returns.  Taxpayer penalty exposure on unfiled Forms 1040/8938 is doubled in the case of unreported foreign income – from 20% to a 40% penalty in a non-voluntary disclosure matters (IRS initiated).  U.S. business and trust entities have the same foreign income reporting obligations.

There are possible criminal charges related to unreported foreign taxable income on individual income tax return filings (Forms 1040).  The government has used the income tax evasion statute (IRC § 7201); the false income tax return statute (IRC § 7206 (1)) and the failure to file income tax return statute (IRC § 7203) to prosecute taxpayers who have ignored the requirement to report worldwide income.

The IRS requires a separate income tax form reporting foreign assets (Form 8938) to be submitted with individual income tax Form 1040.  See discussion later addressing different asset values for required reporting of foreign assets on FBAR’s as opposed to income tax Form 8938.

What is a foreign country?  A foreign country includes all geographical areas outside the United States, the Commonwealth of Puerto Rico, the Commonwealth of the Northern Mariana Islands, and U.S. territories such as Guam, American Samoa and the United States Virgin Islands.

When is the FBAR due?  The FBAR historically had been due by electronic filing by June 30th of the year following the year that the foreign account holder meets the $10,000 aggregate threshold.  However, under Public Law 114-4, dated July 31, 2015, FBAR’s/FinCEN’s for 2016 year and beyond are now due April 15th with an extension option until October 15th. If a filer does not have available information to file the FBAR by October 15th, the taxpayer should file as complete an FBAR as possible and amend the filing when additional information becomes available.  Under statute of limitations rules, FBAR’s need not be filed for years earlier than 2010 except under OVDP.

What happens if a taxpayer is required to file an FBAR or Form 8938 and fails to do so?  Failure to file the information return when required may result in civil penalties.  If you learn you are required to file FBARs and/or Form 8938 with your Form 1040, you should consider immediately filing delinquent FBARs (e-filing only) as well as amended returns (Form 1040X) attaching Forms 8938  before being contacted by the IRS.  Often times, penalties will not be assessed for late filings if the filings are made before IRS contact with the taxpayer and the failures are due to reasonable cause.  It has always been important to report foreign income on Forms 1040.  It is now important to file amended returns (Forms 1040X) for taxpayers who failed to include the required Form 8938 attachment.  There is no statute of limitations for the assessment of a tax penalty ($10,000) for failure to file Form 8938.  See later sections on streamlined procedures which, in most cases, is the appropriate taxpayer vehicle for catch-up tax compliance.

Can cumulative FBAR penalties exceed the amount in the taxpayer’s foreign accounts?  Yes.  Under the penalty provisions found in 31 U.S.C. 5314(a)(5), it is possible for the United States Treasury Department to assess civil penalties for FBAR violations for multiple years in amounts that exceed the current balance in the foreign financial account.

Does the law provide for a variety of FBAR penalties?  There are very few federal court decisions on FBAR penalties which address penalties less than the fifty percent (50%) FBAR penalty.  (Section 821 of the Jobs Act).  However, in conjunction with IRS Chief Counsel guidance, the Department of Treasury has developed guidelines for taxpayers who may have “reasonable cause” for the late filing of FBARs which allow for avoidance of the expensive willful violation penalty structure.  Threshold requirements for avoiding the higher civil penalties are:

  • The taxpayer has no history of past FBAR penalty assessments.
  • The taxpayer’s foreign accounts were not funded with monies from illegal sources or used to further a criminal purpose.
  • The taxpayer cooperated in any examination of the facts.
  • The IRS did not assess “income tax penalties” for their failure to report foreign taxable income on the taxpayer’s individual income tax returns.
  • The inability of the IRS to meet the burden of proof of willfulness on the part of the taxpayers.

If all criteria is satisfied, the IRS guidelines generally provide that the taxpayer may receive either a “reasonable cause” pass or a lesser FBAR penalty.  But IRS discretion on granting reasonable cause is elusive and requires taxpayer full disclosure.

What about the IRS Offshore Voluntary Disclosure Program (OVDP)?

There currently exists an OVDP program for taxpayers who want to sleep at night.  Entering the program results in a 27.5% penalty per year based on FBAR assets and a 20% penalty on all unpaid taxes resulting from unreported foreign taxable income.  Eight (8) years of amended income tax filings and foreign asset reports (FinCEN) are required.  Some knowledgeable tax practitioners advise clients not to enter the basic OVDP program unless there are elements of intentional tax avoidance and evasion in the taxpayer’s filing history.

Are taxpayers still eligible for (non-amnesty or “quiet”) voluntary disclosure protection?  There are factual situations where non-amnesty voluntary disclosure is preferable to amnesty disclosure with OVDP’s guaranteed penalties on a multi-year basis.  In Frequently Asked Question 17 of the Offshore Voluntary Disclosure Initiative, Frequently Asked Questions and Answers publication, the IRS has stated that it will not impose a penalty for failure to file delinquent FBARs if there are no unreported foreign income tax liabilities and the taxpayer has not previously been contacted by the IRS regarding an income tax examination or a request for delinquent FBAR tax filings.

THE STREAMLINED OFFSHORE PROGRAM

On July 1, 2014, the U.S. Treasury announced a Streamlined Voluntary Disclosure Program for taxpayers residing in the United States as well as U.S. citizens residing outside of the United States.  The key to qualifying for the streamlined program is an affidavit statement, under penalties of perjury that the taxpayer’s failures were due to non-willful conduct, that is, conduct that is due to negligence, inadvertence, mistake or conduct that is the result of a good faith misunderstanding of the requirements of the law.

Taxpayer Streamlined filing requirements are the three most recent years’ income tax returns (usually amended returns – Form 1040X), including Form 8938, if applicable.  Also required with the Streamlined Voluntary Disclosure is the filing of FBAR’s for the most recent six years for which an FBAR due date has passed (historically June 30th of a given year).

U.S. Citizens living abroad, if eligible under the streamlined program, are exempt from the penalties on late filed FBAR’s.  Individual income tax returns reported on the newly filed or amended returns can receive the same tax treatment (caveat – high unreported foreign income on Form 1040 may invite penalties).  The streamlined procedures for taxpayers residing in the U.S. are different in that they call for a mandatory penalty – but the penalty is far less than regular OVDP program penalties; only a 5% penalty for one FBAR year in domestic streamlined cases.  Taxpayers are required to file three years of income tax returns and six years of FBAR reporting.  The 5% penalty for FBAR’s is calculated based on the highest account balance reported on FBAR’s during the six years (or shorter period

Streamlined offshore disclosure applications are sent to specific United States Treasury and Internal Revenue Service locations.  There is no guarantee that the government will not audit the filings.  Having said that, it is this writer’s opinion that the United States Treasury passed the Streamlined Program in response to the numerous “quiet disclosures” that were filed during past years.   A filing through the penalty intensive regular Offshore Voluntary Disclosure Program (OVDP) was very unattractive.  Quiet disclosures then, in non-willful cases, were clearly the preferred option for U.S. taxpayers.  The OVDP disclosure option has always carried ruinous penalty assessments discussed herein.

It is the writer’s belief that, unless taxpayers use the OVDP program or the streamlined program, other taxpayer voluntary disclosures (quiet), after July 1, 2014 have a chance of an IRS audit.

Exception:  Foreign taxable income liabilities fully reported and full paid need not use either OVDP or the Streamlined Program.  Simply file delinquent FBAR’s.

Threshold requirements for the streamlined voluntary disclosure treatment are set out below:

First: Is historical unreported taxable income on filed returns modest in scope?  The old “under $1,500” tax threshold has been removed.
Second: Do the actions of the taxpayer seem reasonable given the facts surrounding opening and funding of the foreign account?
Third: Would an independent third party view the taxpayer’s inaction as non-willful in failing to disclose foreign accounts and foreign taxable income?
Fourth: A prior OVDP submission by the taxpayer eliminates qualification for the Streamlined Program; however, the assigned OVDP Revenue Agent may consider the Streamlined Program settlement terms without entering the program.

 

One final note on the Streamlined Voluntary Disclosure Program.  Taxpayers never receive any confirmation of acceptance; however, the IRS retains the right to audit the submission.  The usual Streamlined submission result is a cashed check and silence.

FBAR PENALTIES LESS THAN 50%

Not well known to taxpayers or the tax practitioner community is that the FBAR statute does not require the assessment of the onerous fifty percent (50%) penalty on annual asset values.  The following chart highlights the civil (and criminal) penalties that may be asserted under the FBAR initiative.  Title 26 (Income Tax) penalties have different penalty structures and different government collection authorities.

 

FBAR Violation Civil Penalties Criminal Penalties Comments
Reasonable Cause None None Administrative Waiver
Negligent Simple
Violation in not filing FBAR’s
Up to $500 per violation N/A 31 U.S.C
§ 5321(a)(6)(A)
31 C.F.R. 103.57(h)
Non-Willful Violation in not filing FBAR’s Up to $10,000 for each violation. N/A 31 U.S.C. §
5321(a)(5)(B)
Pattern of Negligent Activity in not filing FBAR’s In addition to negligence penalty under § 5321(a)(6)(A), not more than $50,000. N/A 31 U.S.C. §
5321(a)(6)(B)
WILLFUL FAILURE
TO FILE FBAR
Up to the greater of $100,000, or 50 percent of the value in the account in the year of the violation.  Penalties can be assessed for each separate year. Up to $250,000 or 5 years or both 31 U.S.C. § 5321(a)(5)(C)
31 U.S.C. § 5322(a) for civil; and 31 C.F.R. § 103.59(b)
for criminal.
Willful failure to file FBAR while violating certain other laws (e.g. money laundering) Up to the greater of $100,000, or 50 percent of the amount in the account at the time of the violation. Up to $500,000 or 10 years or both 31 U.S.C. § 5321(5)(C);
31 U.S.C. § 5322(b) and 31 C.F.R. § 103.59(c) for criminal violation.
Willfully Filing A False FBAR Up to the greater of $100,000, or 50 percent of the amount in the account at the time of the violation. $10,000 or 5 year sentence  or both 18 U.S.C. § 1001
31 C.F.R. § 103.59(d) for criminal.
Civil and Criminal Penalties may be imposed together. 31 U.S.C. § 5321(d).

 

It is difficult to obtain information on reported FBAR civil penalty cases in U.S. District Courts which have been assessed in non-criminal, non-willful FBAR cases.  Taxpayers, to date, have enjoyed a free ride or were settled/paid at modest penalty levels rather than litigated by the government for authority to levy and garnish.  Appeals conferences and settlements are available in proposed FBAR penalty cases.  It is clear, however, from our own experience, that the Treasury does assess FBAR penalties for less than the 50% penalty and will waive penalties if there are favorable factual circumstances.

An FBAR penalty is not like an IRS income tax penalty.  In income tax matters (Title 26 of the United States Code), upon IRS assessment of tax and penalty and the issuance of required taxpayer delinquent payment notices, federal statutes allow the IRS to issue non-judicial bank levies, wage garnishments and file federal tax liens for unpaid income taxes and penalties.  No federal court judgment is required in income tax penalty matters.  IRS administrative collection authority is built into the income tax statutes (Title 26 U.S.C.) for obvious protection of revenue.

With regard to non-income tax penalties (Title 31 matters) such as FBAR penalties, the government must look to the general statute authorizing the collection of general debt owed to the government.  The FBAR penalty is governed by Title 31, Subtitle III, United States Code § 3711 under general government collection administrative procedures against a debtor.  The statute sets out the options of the executive branches if a U.S. citizen or resident alien has not paid the government monies owed for one (non-Title 26 tax matter) reason or another – including Title 31 FBAR penalties

U.S. Code § 3711 is very specific about the requirement of a court judgment to actively levy, garnish or lien debtors in collection matters “except taxes and penalties of the Internal Revenue Code of 1986” (Title 26 U.S.C. 1 et. seq.).  It is Title 26 (income tax) and IRS collection practices which most individuals and businesses know and fear because of administrative powers of the IRS.  Non-Title 26 government debt collection matters do not have the teeth of the broad reaching administrative collection authority given to the IRS, e.g., levy, garnishment, offset of monies due (such as refunds and Social Security payments), foreclosure, tax lien filing, all without a federal court judgment.

Even before the U.S. Treasury can disclose FBAR debt information to a consumer reporting agency, the U.S. Treasury must provide the FBAR debtor an administrative opportunity to “review the obligation of the person, including an opportunity for reconsideration of the initial decision on the claim.”  U.S.C. § 3711(e)(ii).  This offers an initial administrative hearing for a taxpayer to justify taxpayer FBAR non-compliance and perhaps escape credit bureau issues.

Perhaps most important for taxpayers with foreign accounts, are their judicial rights under U.S.C. § 3711(g)(4)(C).  The government must first file a federal lawsuit in an attempt to obtain an enforceable federal court judgment against the FBAR penalty debtor.  An answer can be filed to counter the compliant filing.  There is no FBAR lien or FBAR assessment subject to levy and garnishment until the rendering of an order from a federal court.

Unclear is whether the Department of Treasury can make an income tax refund offset for a penalty under the FBAR statute before litigation and judgment.  U.S.C. § 3711(g)(9) would suggest that an offset of a Form 1040 refund by Treasury is possible without a court judgment.

There is very little in the way of reported cases about FBAR penalties against taxpayers in non-criminal situations.  There are any number of reported FBAR civil cases in recent years where a taxpayer has been indicted for criminal tax evasion as well as subject to civil litigation in U.S. District Court to allow for execution on judgment for penalties under the FBAR statutes (U.S.C. §§ 5321 and 5322.)  The cases, with rare exception, address maximum 50% penalty issues.

It can therefore be stated unequivocally that FBAR civil penalty collection actions do not have the teeth of Title 26 Internal Revenue Service matters relating to income tax, Social Security tax, Medicare tax, Form 8938 penalties, gift tax, estate tax, excise tax and a variety of other miscellaneous taxes under Title 26 of the United States Code.

The curious taxpayer can read recent FBAR penalty court cases which highlight the lengthy process required of the government to obtain an enforceable judgment in FBAR civil penalty matters.  See Williams I, Williams II, and Williams III, (2012-5298(CA-4), 2012).  In another recent case, McBride, United States District Court, Utah, 2012, AFTR2d 2012-6600, the government filed a civil lawsuit against the defendant who had not paid an assessed FBAR penalty.  The suit was filed in 2009, with the government filing a motion for summary judgment on the pleadings.  The judge, pursuant to a hearing on the matter, denied the government’s motion for summary judgment on the FBAR penalty.  The court stated later that simple preponderance of evidence was not the appropriate judicial standard of willfulness required for the FBAR penalty to be enforced by court order.  The court took their time in deciding not to rubber stamp the government’s request for an FBAR judgment and authority to execute on judgment.

It is clear that taxpayers have both administrative and judicial rights in FBAR civil penalty matters.  This differs from income tax matters where taxpayers face the immediate and immense collection powers of the IRS.

FORM 8938 PENALTIES

Form 8938 (a report of foreign account asset values) is a required filing with the form attached to Form 1040 for all years since 2011 (IRC 6038D).  Form 8938 penalty collection rules are far different than FBAR rules for government collection authority.  As many taxpayers know, the IRS has powerful administrative authority to investigate, assess tax and collect tax, penalties and interest.  Form 8938 penalties are now part of Internal Revenue Service legislative authority and Form 8938 penalties can simply be assessed administratively.  With a Form 8938 assessment comes the powerful IRS collection tools of levy, garnishment and tax liens without the blessing of a federal court.

Below is a comparison of Form 8938 and FBAR filing requirements which highlight the differences of Form 8938 from the FBAR (Form TD 90-22-1; now FinCEN Form 114).  The below information was obtained from official IRS notices issued to explain filing requirements for Form 8938.  Note the difference in the penalty structure under the income tax rules versus the FBAR rules.

Newer rules indicate that FACTA legislation does not require Form 8938 to be filed if the taxpayer for a given year does not have to file a Form 1040.

 

Form 8938 Attached to Form 1040, Statement of Foreign Financial Assets Form TD F 90-22.1, FinCEN 114 Foreign Bank and Financial Accounts
Who Must File? U.S. citizens and resident aliens who meet the threshold requirements. Domestic entities in future years. U.S. person, which include U.S. citizens, resident aliens and corporations, partnerships and trusts.
Does the United States include U.S. territories? No. Yes, resident aliens of U.S. territories and U.S. territory entities are subject to FBAR reporting.
Reporting Threshold (Total Value of Assets) $50,000 on the last day of the tax year or $75,000 at any time during the tax year (married individuals filing joint returns have higher thresholds at $100,000/$150,000); $200,000/$400,000 for those living abroad. $10,000 at any time during the calendar year.
When do you have an interest in an account or asset? If any income, gains, losses, deductions, credits, gross proceeds, or distributions from holding or disposing of the account or asset would be required to be reported or otherwise reflected on your income tax return.  Social Security-like assets are exempt.  Real property held individually is exempt. Financial interest: If you are the owner of record or holder or legal title to an intangible asset you then have a sufficient interest to require a FinCEN return.  Real estate held individually and Social Security like government benefits are exempt.

Signature authority: you have authority or control over the disposition of the assets in the foreign account by direct communication with the financial institution maintaining the account.  True for both individual and business accounts.

See FBAR instructions for further details.

What is Reported? Maximum value of specified foreign financial assets, which include accounts with foreign financial institutions and certain other foreign non-account investment assets. Maximum value of financial accounts maintained by a financial institution physically located in a foreign country.  Not real estate or social security like retirement plans.
How are maximum account or asset value determined and reported? Fair market value in U.S. dollars in accordance with the Form 8938 instructions for each account and asset reported.

 

Convert to U.S. dollars using the end of the taxable year exchange rate and report in U.S. dollars.

Use account statements to determine the maximum value in the account.

 

Convert to U.S. dollars using the end of the calendar year exchange rate and report in U.S. dollars.

When Due? By due date, including extension, if any, for income tax return (Form 1040) or other domestic entity. See Form 8938 comments.  Now April 15th of the succeeding year.
Where to File? File with income tax return pursuant to instructions for filing the return. E-filed only.  Form FinCEN Form 114.
Penalties Up to $10,000 for failure to disclose and an additional $10,000 for each 30 days of non-filing after IRS notice to taxpayer of a failure to file Form 8938, for a potential maximum penalty of $60,000; criminal penalties if willfulness present.

 

Additionally, normal 20 percent negligence penalty is increased to 40 percent for non-reported foreign taxable income on Form 1040.

If non-willful failure, non-penalty or up to  to $10,000; if willful, up to the greater of $100,000 or 50 percent of the annual account balances; criminal penalties may also apply.

 

Waived in reasonable cause cases.

Types of Foreign Assets and Whether They are Reportable
Individual financial (deposit and custodial) accounts held at foreign financial 1st institutions Yes. Yes.
U.S. domestic entity with foreign assets No.  But other forms may be required Yes; but if entity is owned by single owner; then only one FBAR required – the individual owner; yes if 50% of income is passive-exclusive of trade or business income and rental income.
Financial account held at a foreign branch of a U.S. financial institution No. Yes
Financial account held at a U.S. branch of a foreign financial institution No. No.
Foreign financial account for which you have signature authority No, unless you otherwise have a beneficial interest in the account. Yes, subject to exceptions.  Note  business employees with signature authority not usually penalized.
Foreign stock or securities held in a financial account at a foreign financial institution The account itself is subject to reporting, but the contents of the account do not have to be separately reported. The account itself is subject to reporting, but the contents of the account do not have to be separately reported.
Foreign stock or securities not held in a financial account Yes. No.
Foreign partnership interests Yes. No.
Foreign mutual funds Yes, if held overseas. Yes.
Domestic mutual fund investing in foreign stocks and securities No. No.
Foreign accounts and foreign non-account investment assets held by foreign or domestic grantor trust for which you are the grantor Yes, as to both foreign accounts and other foreign investment assets. Yes, as to foreign accounts.
Foreign-issued life insurance or annuity contract with a cash-value Yes. Yes.
Foreign hedge funds and foreign private equity funds Yes. No.
Foreign real estate held directly by taxpayer No. No.
Foreign real estate held through a foreign entity Yes but only if the foreign entity itself is a specified foreign financial asset and its value includes the value of the real estate. No.
Foreign currency held directly No. No.
Precious Metals held directly No. No.
Personal property, held directly, such as art, antiques, jewelry, cars and other collectibles No. No.
‘Social Security’ – type program benefits provided by a foreign government No. No.

 

MORE INFORMATION ON NON-AMNESTY DISCLOSURES

Not well-understood is that non-amnesty voluntary disclosures by taxpayers (quiet disclosures) generally did not result in criminal prosecution or onerous penalties.  Over the years, this office has witnessed that taxpayer voluntary disclosures of past foreign asset and tax reporting failures did not result in criminal prosecution.  Usually, an IRS administrative criminal investigation of a voluntary disclosure does not result in an IRS criminal recommendation forwarded to the Department of Justice.  Those cases that are forwarded by the IRS for criminal prosecution on occasion are rejected as criminal matters by IRS District Counsel, the local United States Attorney’s Office or the Department of Justice.  A disclosure, however, is not considered voluntary if the IRS is aware of taxpayer non-compliance before the taxpayer disclosure.

Internal Revenue Manual 9.5.11.9(4) reflects general IRS voluntary disclosure guidelines outside the historic FBAR amnesty programs.  The IRS, however, can take the position that voluntary disclosure in offshore matters will not be honored.  But the IRM manual does suggest mitigating fact patterns in foreign account disclosure matters allowing for reduced penalties.

In general, IRS disclosures are timely if received before:

  1. The IRS has initiated a civil examination or criminal investigation of the taxpayer, or has notified the taxpayer that it intends to commence such an examination or investigation;

 

  1. The IRS has received information from a third party e.g., an informant, a person subject to indictment, a foreign treaty or settlement of a government lawsuit against a financial institution alerting the IRS to a specific taxpayer’s non-compliance. A good example is Union Bank of Switzerland’s widespread disclosure of taxpayer’s foreign accounts in the years following 2009 due to a settlement agreement pursuant to a U.S. District Court action.  If the government already knows about you, a voluntary disclosure will not avoid a civil or criminal investigation.  Post the Union Bank of Switzerland 2009 disclosures, most other foreign banks are disclosing U.S. related accounts due to U.S. regulatory pressures, treaties and international cooperation.

 

  1. The IRS has acquired information directly related on the possible liability of the taxpayer from another source (e.g., search warrant, grand jury subpoena, plea bargaining, whistle blower, current criminal investigation, foreign treaty).

 

Regardless of the date of disclosures, if a taxpayer has paid all of the income tax due on foreign taxable income, delinquent FBAR’s/FinCEN’s can be filed under a penalty free  “quiet disclosure” option currently offered by the IRS.

 

The Internal Revenue Manual encourages that Special Agents of the IRS Criminal Investigation Division consult with IRS attorneys on all voluntary disclosure cases coming to their attention.  A taxpayer must submit a voluntary disclosure before taxpayer information is received by the IRS.  There are dozens of financial tax advisors and financial institutions who have been indicted/plead guilty to offshore crimes that are presently turning over taxpayer names on a regular basis.  Treaties with foreign countries have also led to institutional disclosures of foreign accounts to the U.S. Treasury

Internal Revenue Manual 4.26.16.4.7 states that in non OVDP/Streamlined Procedure matters IRS Agents should use their best judgement.  Reasonable cause facts can lower the penalty assessment.

CONCLUSION

In this swirling enforcement environment, tax practitioners continue to be approached by clients seeking advice on how to clean up their offshore affairs before the government comes knocking at their door.  The cases range across a broad factual spectrum from criminal matters under Title 26 and Title 31 with draconian civil penalty concerns down to taxpayers having reasonable cause enabling them to escape FBAR/FinCEN and income tax penalties.  Historically, taxpayers faced bookend positions with a minefield of uncertainty – a quiet disclosure, a streamline program submission or the penalty ridden OVDP program.  But currently, under announced streamlined procedures for U.S. citizens residing in the U.S. or residing abroad, the procedures have created a level of certainty that did not exist for U.S. citizens before the summer of 2014.  This is particularly welcoming news for U.S. citizens residing and working abroad.  The obvious approach for resident aliens or U.S. citizen (living domestically or overseas) with foreign account concerns is a proactive approach.  It clearly is not sitting back with the hope that the IRS does not send you a letter or have a government representative knock on your door.

Aside from FBAR developments, the required Form 8938, FACTA legislation, and Treasury regulations reflect continuing attempts by the government to fight the foreign account compliance battle.  Assessments on Form 1040/Form 8938 penalties are a huge step, both in obtaining foreign account information and the ability of the government to collect information and raise revenue on foreign account matters without resorting to federal courts.

A careful analysis will determine if a taxpayer has reasonable cause for his noncompliance or if he willfully hid assets in foreign jurisdictions to avoid or evade taxes.  In between these bookends are penalty issues such as negligence, taxpayer cooperation, voluntary disclosures, harm to the government through unpaid income tax dollars and the government’s burden of proof in federal courts before a FBAR penalty becomes an enforceable judgment.  The issues tend to be legal in nature – it is not recommended that taxpayers solely utilize CPA’s or Enrolled Agents in foreign account matters.

The manner and means of such disclosure and the reporting positions undertaken by the taxpayer must be determined only after careful analysis of all relevant facts of a particular case.