Foreign Bank Accounts

By: Jack M. Battaglia, Esq.

Over the last few years there has been a big push by the Internal Revenue Service and the Department of Justice to have United States taxpayers with foreign bank accounts disclose those accounts through their Offshore Voluntary Disclosure Program.

In addition, the Department of Justice and the Swiss Government entered into an agreement which would allow Swiss banks to potentially mitigate U.S. criminal charges for helping U.S. taxpayers avoid tax through secret Swiss bank accounts.

As a result, many Swiss banks have been notifying United States customers that they are about to disclose their names to the United States Department of Treasury, if they do not come in compliance with the United States law requiring the disclosure of foreign bank accounts.

On top of this FATCA (Foreign Account Tax Compliance Act) was enacted in 2010 imposing reporting obligations on foreign financial institutions relating to U.S. account holders. The U.S. Department of Treasury has also entered into agreements with France, Germany, Italy, Spain, the United Kingdom, and approximately 50 companies to adopt programs exchanging information on U.S. taxpayers with foreign bank accounts.

Disclosure Requirements

FBARs

Any U.S. taxpayer who owns a foreign account or has signature authority over that account must disclose that account to U.S. authorities on an FBAR (Report of Foreign Bank and Financial Accounts), if the account or total of all accounts exceed $10,000 at any time during the year. The form must be filed no later than June 30 ^th of the subsequent year.

For example, if the taxpayer had a foreign bank account in excess of $10,000 at any time during 2013, it must be reported by June 30, 2014 to the Department of Treasury on the FBAR.

Taxpayers are also required to "check the box" on Schedule B of their tax return indicating whether or not they have a foreign bank account.

Form 8938

In addition, since 2011 taxpayers are also required to file Form 8938 with their income tax return disclosing any foreign financial assets which total more than $50,000 on the last day of the year or $75,000 during the year for single individuals. For married individuals, the threshold amounts are $100,000 and $150,000.

Penalties

Those taxpayers who have not complied with the above requirements are subject to substantial civil and criminal penalties.

For FBARs, the criminal penalty for a willful failure to file the FBAR is a prison term of up to 10 years and penalties of up to $500,000 per violation.

In order to prosecute successfully, the Department of Justice must show that there was an intentional failure to file with knowledge of the obligation to file the FBAR. This can be a very difficult threshold for the Department of Justice in most cases. Therefore, they tend to rely primarily on the civil penalties.

There are two civil penalties for failure to file the FBAR:

• A non-intentional failure to file - up to $10,000 a year for the last six years.
• A willful failure to file – up to the greater of $100,000 or 50% of the total balance of the foreign bank account per violation.

In addition to the FBAR penalties, there is a penalty for failure to file the Form 8938 which is a $10,000 a year penalty for each year the form is not filed. Since From 8938 did not come into effect until 2011, the penalties would be $10,000 for failure to file for 2011, 2012, and 2013. The penalty is not "up to" $10,000 but is a flat $10,000 penalty for each year the form is not filed. In order to eliminate the penalty, the taxpayer must show that there is "reasonable cause" for not filing the return.

Reasonable cause may consist of a good tax compliant history, the promptness in filing the delinquent Forms 8938, lack of knowledge of the requirement, and reliance upon your accountant to inform you of this requirement.

OVDP

The Internal Revenue Service has initiated an Offshore Voluntary Disclosure Program (OVDP) to mitigate these penalties. In this program, the taxpayer must disclose all of his foreign bank accounts and relevant information relating to that bank account. In exchange for this, civil penalties are limited and criminal penalties may be avoided.

In order to participate in the program a taxpayer must:

• Not be under any civil or criminal investigation by the Internal Revenue Service.
• Pay a penalty of 27.5% of the highest value of the offshore account during the last eight years.
• File amended tax returns for the last eight years reporting any unreported income during those years from the foreign account and pay the taxes, interest, and a penalty equal to 20% of the additional taxes.

As you can see, these penalties are very severe and can amount to substantially more than the current value of the bank account.

For example, assuming that in the last eight years the highest value of the foreign bank account was $500,000 but with withdraws from the account the value is now $100,000. Under the OVDP the penalty would be $137,500 plus the taxes, penalties and interest on the unreported income.

This amounts to more than the current value of the account.

Assuming the taxpayer did not know of his or her obligation to file the FBAR, the taxpayer may be better off not participating in the program and doing a "quiet disclosure" as opposed to entering the program. An example of "not knowing" would be that the taxpayer's accountant never asked the taxpayer about a foreign bank account or the answer to the "check the box" question on the tax return.

Quiet Disclosure

A quiet disclosure is merely filing the delinquent returns and hoping for a better result than you would obtain under the OVDP if you are audited by the Internal Revenue Service.

This would include filing the delinquent FBARs for the past six years, amended tax returns for either three years or six years depending upon the statute of limitations, and the Form 8938 for 2011, 2012, and 2013 which is attached to the amended income tax return.

There are two possibilities here, the IRS may not audit the taxpayer and accept the amended returns and the FBARs as filed.

However, as a result of a recent Government Accountability Office finding, it is expected that the IRS will pursue "quiet disclosures" with more vigor.

Therefore, one can expect that the filing of the FBARs and the amended tax returns will more likely than not will trigger an audit and the taxpayer will then have to show that the failure to file the FBAR was not willful or intentional. In addition, the taxpayer will have to show that there was "reasonable cause" for failure to file the Form 8938.

Unless there is evidence of the taxpayer's "willfulness" in failing to file the FBAR, the maximum penalties would be $10,000 a year for six years or $60,000, plus the penalties of $10,000 a year or $30,000, for failure to file the Form 8938. Absent willfulness, these are the maximum penalties that could be imposed but it is possible that they might not be imposed to their maximum extent. In any event, they could much less than the amount of the penalties under the OVDP. See the above example.

"Opt Out"

The third alternative is to enter the OVDP and then opt out at the last moment. This is a procedure recognized by the Internal Revenue Service which gives you the opportunity to opt out after you have been informed of the penalties. If the taxpayer feels that the penalties are too stringent and the taxpayer gets an indication from the revenue agent working on his disclosure that the penalties may be lesser if he or she was not in the program, then the taxpayer may opt out.

This is a common procedure recommended by many tax professionals.

Conclusion

Now is the time for taxpayers with undisclosed foreign international accounts to come forward and take advantage of one of the three alternatives described above. In doing so, the taxpayer should rely upon experienced counsel in this area to weigh and discuss the pro and cons of each alternative.