Travis H. Long, CPA, Inc. Blog

Originally published in the Cedar Street Times

August 8, 2014

In July, a few new and more attractive options became available for taxpayers that have accounts in foreign countries that they have not reported.  Taxpayers with over $10,000 in aggregate in bank or financial securities accounts (or even just signature authority on someone else’s account) established outside the United States have a requirement to report these accounts to the United States Treasury Department by electronically filing Financial Bank Account Reporting (FBAR) Form FinCen 114 by June 30th each year.  In addition, there is a requirement to report any related income on your tax returns and possibly file another reporting form (Form 8938) with your tax returns as well.

These requirements do not just apply to rich people that establish accounts overseas to “hide” money and not pay taxes.  If you are simply residing in the U.S. as defined by U.S. tax law and file tax returns as a resident, these requirements apply to you. Many foreigners residing in the U.S., or people with roots in foreign countries from years ago that still maintain bank accounts in another country do not realize this applies to them.  It also applies to U.S. taxpayers residing outside the United States – such as U.S. citizens or green card holders.

The mission, as stated by the Financial Crimes Enforcement Network in the Treasury Department is, “to safeguard the financial system from illicit use and combat money laundering and promote national security through the collection, analysis, and dissemination of financial intelligence and strategic use of financial authorities.”

The stated penalties for failure to comply are massive by most people’s standards.  If you are caught before coming forward on you own, and it becomes apparent you were aware of the requirement but specifically chose not to report, or even if you were not aware, but it is apparent you purposely did not take reasonable steps given your circumstances to find out (willful blindness), the penalty is the greater of $100,000 or 50 percent of the account balance and possible criminal prosecution.  Even a truly non-willful situation (i.e. I had no idea I had to file) carries a $10,000 PER violation penalty if caught.

The IRS has had several voluntary disclosure programs over the past few years to help people come clean.  The most recent program (2012 Offshore Voluntary Disclosure Program – OVDP), carried with it a hefty penalty – conceding 27.5 percent of the account balance on top of filing eight years of amended tax returns and paying past due tax, interest, and penalties on any income generated for those years. Besides having minimum tax liabilities that would keep many people out of the program, it just seemed like the punishment far exceeded the crime for those who were non-willful violators.

The all new Streamlined Domestic Offshore Procedures and Streamlined Foreign Offshore Procedures provide a much more palatable avenue for those who have non-willful violations.  The new domestic program requires three years of amended tax returns, six years of FBARs, signed affidavits attesting to the non-willful nature, and only a five percent penalty.  The five percent is calculated on the highest aggregate year-end balance of your accounts during the past six years.  For U.S. taxpayers living abroad the foreign program is similar but does not even have a five percent penalty!  For situations that could be deemed willful, the 2012 OVDP program is still available as well.

I have been involved with both the 2012 Offshore Voluntary Disclosure Program and now the new Streamlined Domestic Offshore Procedures program with clients, and it definitely feels like this new program is a good option for people with non-willful violations who want a greater sense of closure.  For people who still cannot stomach the idea of giving up five percent, there are other possible options to discuss which are better than doing nothing and continuing to be non-compliant.  If there is any chance that a willful case could be made, I would also advise you to keep conversations with your accountant hypothetical and broad until you are connected with the right attorney that specializes in this area. Communications with attorneys are privileged, whereas communications with accountants, although confidential, are not generally privileged until the attorney hires the accountant directly.  In two weeks I will discuss this concept in more detail.

Prior articles are republished on my website at www.tlongcpa.com/blog.

Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.