By: Alan L. Glazner, Esq.
Under the Foreign Account Tax Compliance Act and other tax laws, all U.S. Taxpayers who own foreign bank accounts are required to file Form TDF90-22.1, Report of Foreign Bank and Financial Accounts (also known as FBAR’s). Failure to report foreign bank assets can result in severe civil penalties as well as felony criminal penalties which could include up to ten years in jail.
Beginning in 2009, the IRS created an amnesty program to encourage taxpayers who had undisclosed foreign accounts to come forward, disclose their accounts, pay the related penalties and taxes and receive immunity from civil and criminal prosecutions. The program has been very successful and has been extended several times, with various modifications. However, the IRS recently announced that the program will end on September 28, 2018, and it is uncertain if it will be replaced or extended after that date.
HOW THE PROGRAM WORKS
Under the current OVDI program, taxpayers are required to file eight years of amended tax returns and delinquent FBAR’s. The amended returns must include the undisclosed interest or earnings from the foreign accounts. In addition to the additional taxes due and penalties on the tax for late payment and underpayment there is a miscellaneous penalty equal to 27 ½% of the highest aggregate balance in the unreported foreign accounts during the eight-year period. The penalties increase to 50% if the accounts are held in any institution on the IRS’ Foreign Financial Institutions or Facilitators list.
Note that the reporting requirement does not just apply to foreign bank accounts. Insurance policies, securities, artworks, real estate, patents or stock in foreign companies must all be disclosed and valued.
Acceptance into the OVDI Program is not automatic and is a multi-step process. Applicants must first apply for preclearance by submitting a request to the IRS Criminal Investigation Lead Development Center (LDC). LDC will determine if the taxpayer is eligible to enroll; i.e., he is not under investigation or audit, and has not previously violated tax laws. The preclearance process takes up to thirty days to complete. Once accepted, the amended tax returns, FBAR’s and related materials must be submitted to IRS within 90 days.
ALTERNATIVE PROCEDURES-STREAMLINED FILING
As an alternated to the OVDI procedure, IRS instituted the Streamlined Foreign Account program. Under this program, a taxpayer is required to file only three years of amended tax returns and six years of FBAR’s. The miscellaneous penalty is 5%, instead of 27 ½%.
The primary qualification requirement to enter the streamlined program is submission of proof that the failure to report foreign assets was non-willful. Examples of non-willful reporting include taxpayers who inherit an account or property from a relative, or have an account set up for them when they were children and they had no knowledge of the accounts.
Taxpayers who submit under the Streamlined procedure DO NOT receive protection from criminal prosecution. IRS conducts very thorough investigations of submissions under the Streamlined procedure including reviewing deposits and withdrawals, interviewing account representatives, reviewing correspondence and emails, etc. Accordingly, unless a taxpayer and his representative are absolutely convinced that the Taxpayer has no knowledge of the account, it can be extremely dangerous to expose oneself to possible criminal penalties by utilizing this program and being rejected.
WHAT SHOULD YOU DO?
Time is running out if you have unreported foreign assets and wish to comply under the OVDI program. Mandelbaum Salsburg P.C. is prepared to help you comply, but you must start now since your preclearance needs to be submitted before the September 28, 2018 deadline. In order to apply, you will need to have the following information:
- The identity of every unreported foreign asset;
- Copies of your last filed eight tax returns; and
- Documentation of both the income generated and the value of your foreign assets during the past eight years. This includes deposit and withdrawal statements, monthly or quarterly statements, rental income, etc.
Mandelbaum Salsburg’s Tax Law Practice Group is well-versed in assisting clients in complying with the Foreign Account Tax Compliance Act and other related tax laws. We will work with your accountant and other professionals to insure that you receive the best possible representation before the IRS. You can review our services and professionals at