U.S. Citizens worldwide have recently learned, especially through the enactment of FACTA, that they have a responsibility to come forward to the IRS. U.S. Citizens, whether residents or non-residents, dual citizens, and even non-U.S. Citizens who are deemed U.S. Residents are generally all required to report their worldwide income to the IRS, despite where they reside. This means filing tax returns reporting your worldwide income and filing any necessary information returns; including reporting foreign bank accounts and foreign financial assets.
Coming forward to meet your filing requirements may be scary, but the IRS has made some recent changes that may make it beneficial for some to come forward now, rather than wait. Compliance with these programs may in some instances require the filing or re-filing of tax returns to include income that was not reported for the relevant tax years. To be eligible for many of these programs, you should have no reason to believe that the IRS has any knowledge of your failure to file tax returns, or information reports, or disclose your true income. If the IRS has knowledge of your failure to file, to report, or disclose income for any tax year prior to acceptance into the IRS delinquency programs being secured, you will not be eligible for the programs.
IRS programs change frequently. Unlike the CRA, where programs maintain a certain degree of transparency and consistency, the IRS changes the mandate and eligibility of its programs regularly. This means that when the IRS comes out with a new program that has promise, that the individual wanting to come forward has reason to seize the program. The programs are not guaranteed to always be around and are continuously changing.
Required to report a Foreign Bank Account or Foreign Financial Assets?
The requirements to report foreign bank accounts vary. There are two main types of reports that may be needed, which are independent of each other. One is the Foreign Bank Account Report (“FBAR”), the other is under the Foreign Accounts Tax Compliance Act (“FATCA”), and both have different reporting thresholds and rules.
Under FATCA, one must report using Form 8983 a Statement of Specified Foreign Financial Assets if they are above the reporting threshold for accounts held outside of the U.S. and if they have to file an income tax return for the tax year. This means that if you do not have to file an income tax return for the tax year (i.e. you were below the income reporting threshold), then you do not have to file Form 8983 even if the value of your specified foreign financial assets is more than the appropriate reporting threshold. Thresholds also vary depending on your marital status, whether you reside outside of the U.S., and whether you file a joint or separate income tax return. For instance an unmarried taxpayer residing in the U.S. has to report foreign financial assets if the total value of the assets is over $50,000 on the last day of the tax year or more than $75,0000 at any time during the tax year. This is quite different to that of an unmarried taxpayer living outside of the U.S. who satisfies the reporting threshold if the total value of the specified foreign financial assets is more than $200,000 on the last day of the tax year or more than $300,000 at any time during the tax year.
Even if you do not file under FATCA, you may still be responsible to file A Report of Foreign Bank and Financial Accounts (“FBAR”), regardless of whether you earned income during the year. The threshold is much lower to that of FATCA; FBARs must be filed when the aggregate value of all foreign financial accounts exceeds $10,000 at any time during the calendar year reported, and the U.S. person had a financial interest in or signature authority over at least one financial account located outside of the U.S.
What programs are available?
The IRS has had a number of programs made available for taxpayers to come clean with their delinquent tax returns and information reporting. Until recently, the IRS gave little incentive for the taxpayer, U.S. Resident, Dual citizen, or Deemed U.S. Citizen to come forward with their filing obligations; penalties have been high, and risks of triggering an audit and criminal liability were a true threat.
For instance, eligibility for the Streamlined Filing Compliance Procedure used to be very narrow, with strict guidelines, making it only applicable to few individuals. You were required to be “low risk” based on a number of factors. The previous $1,500 ceiling for back taxes owed has disappeared. The program has also opened up to allow domestic U.S. residents to participate in the program. What used to be a 27.5% penalty for failure to file an FBAR is no longer; there is now a lower 5% penalty for U.S. residents and 0% for non-residents.
In comparison to the Streamlined Procedure, the Offshore Voluntary Disclosures Program (“OVDP”) has higher penalties and more thorough reporting requirements (for instance 8 years of disclosure is required), but it does offer protection from criminal prosecution. For some taxpayer this is a primary concern. In certain situations one may also apply for penalty mitigation if in disagreement with the application of offshore penalties.
Not all delinquent filers need to participate in the above-mentioned programs. It may be in one’s best interest to instead participate in Delinquent FBAR submission procedures or Delinquent international information return submission procedures.
For instance, if you have delinquent FBARs and unintentionally failed to report foreign accounts, but did properly report your income from those accounts and paid all of the taxes on the income from the foreign financial accounts reported on the delinquent FBARS, then penalties will be waived completely for the failure to file an FBAR. This would require that you just recently learned that you should have been filing FBARs in prior years to report a personal foreign bank account or to report signature authority over bank accounts owned by an employer, and that you have not previously been contacted regarding an income tax examination or a request for delinquent returns; are not under civil examination or a criminal investigation by the IRS. When filing FBARs late, a statement must be attached explaining why the information return is filed late; if there is an explanation of reasonable cause then no penalties will be assessed.
If there was unreported income from the foreign financial account, it is best to consider your eligibility under either the streamline procedure or the OVDP; as even non-willful failure to file an FBAR can result in a civil penalty not to exceed $10,000 per violation; and even worse results if failure was considered willful. For willful violations the penalty may be the greater of 50% the balance in the account at the time of the violation or $100,000, for each violation. Each year is considered a new and distinct violation. Criminal penalties may also apply for willful violations.
If you are considering coming forward to the IRS, it is highly recommended that you consult a professional. The benefits and consequences of each program should be examined carefully based on the facts of your case. You should not rely upon the contents of the document in order to represent yourself.
IMPORTANT NOTE: The above information is not legal advice and is purely informational. The accuracy of which cannot be guaranteed.