U.S. taxpayers should review reporting obligations for foreign accounts and foreign investments to avoid civil and criminal penalties.
U.S. taxpayers have information reporting obligations with respect to holdings in foreign accounts as well as non-U.S. investments. U.S. taxpayers include U.S. citizens, U.S. resident aliens and business entities formed under state law. Form FinCen 114, colloquially known as “FBAR,” is where taxpayers report foreign accounts, which include deposit or custodial accounts in branches with a non-U.S. address. A variety of other special IRS forms are used to report non-U.S. investments such as foreign financial assets (including foreign bank accounts), equity interests in foreign entities and bonds issued by foreign borrowers. Failure to comply with reporting requirements for foreign accounts and/or for foreign investments can result in substantial civil penalties and possible criminal violations.
The U.S. Internal Revenue Service (IRS) offers several options for addressing failures to comply with such information return obligations. If there is risk that a taxpayer’s failure to report could be considered willful by the IRS, the taxpayer will need to act quickly to take advantage of an expiring program that typically avoids criminal prosecution.
Offshore Voluntary Disclosure Program Taxpayer with exposure to potential criminal liability or substantial civil penalties due to a willful failure to report foreign financial assets and/or pay tax in respect of those assets may consider the Offshore Voluntary Disclosure Program (OVDP). The OVDP provides taxpayers with an opportunity to voluntarily disclose foreign assets in compliance with their tax filing and information reporting obligations. Under this program, the taxpayer will be required to pay a penalty, but may avoid prosecution.
The OVDP is currently available, but the IRS will close the program effective September 28, 2018. U.S. taxpayers who want to try to take advantage of this program should contact their U.S. tax consultant immediately.
Other Options When Failure to Report Was Non-Willful
Where a taxpayer’s failure to report was non-willful, the IRS offers other options for potential relief from penalties.
Delinquent FBAR submission procedures U.S. citizens, U.S. resident aliens or U.S. business entities that own a direct (or indirect) interest in a foreign financial account or U.S. citizens or resident aliens who have signing authority over a foreign financial account may be required to report their financial interest in, or signature authority over, such accounts on an annual basis.
Taxpayers who have not filed a required FBAR, are not under a civil or a criminal investigation by the IRS, and have not been contacted by the IRS about a delinquent FBAR, can file delinquent FBARs in accordance with standard FBAR instructions and include a statement explaining why the filing is late.
The IRS has stated that it will not impose a penalty for the failure to file the delinquent FBARs if income from the foreign financial accounts reported on the delinquent FBARs is properly reported and taxes are paid on the taxpayer’s U.S. federal income tax return, and if the taxpayer has not previously been contacted by the IRS regarding an income tax examination or a request for delinquent returns for the years in which the delinquent FBARs are submitted.
Taxpayers should contact their U.S. tax consultant before filing any current, delinquent or amended FBAR filings.
Delinquent international information return submission procedures U.S. taxpayers (including U.S. resident aliens and business entities) who mistakenly failed to file or who have filed incomplete required IRS information forms for interests in foreign entities may also be subject to substantial civil penalties.
Under special procedures, a U.S. taxpayer can file the delinquent information returns along with an explanation of reasonable cause for the failure to file. It may be difficult to establish reasonable cause for not timely filing the information returns as the IRS considers a limited number of factors in deciding whether to accept a reasonable cause argument.
Taxpayers must also certify that any entity for which the information returns are being filed was not engaged in tax evasion. The IRS may also not waive the penalty if the taxpayer has already been contacted about the delinquent information returns by the IRS or is under a civil examination or a criminal investigation by the IRS.
Taxpayers should contact their U.S. tax consultant before filing any delinquent or amended returns and should also seek advice regarding the reasonable cause statement.
Disclaimer This alert is only intended to provide a high-level overview of options available to U.S. taxpayers that failed to pay U.S. tax and/or disclose foreign assets and/or provide other informational returns. The programs and procedures described above are not an exhaustive list. There are additional programs and options for taxpayers who failed to report foreign assets and/or pay U.S. tax such as the IRS-Criminal Investigation Disclosure Program, Streamlined Filing Compliance Procedures and other options. Such programs and procedures are complex and are subject to change. The circumstances of a taxpayer with foreign assets and investments may vary widely. Information contained in this article is not intended as legal or tax advice to any person. All readers must rely on their own legal and tax advisors. If you have any questions or need assistance with delinquent filings or filing amended returns, please contact John Buckun at 312-344-2888 or Bill Major at 847-527-1012.