How do I comply?

I have been complying and wish to stay compliant

  • Report and pay tax on income earned from foreign financial accounts
  • Report on Schedule B, Interest and Ordinary Dividends
  • File Form 8938 (if applicable threshold), Statement of Specified Foreign Financial Assets
  • File FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR) (formerly TD F 90-22.1)

I have never complied before. What do I need to do?

If a taxpayer and or spouse has never complied with their foreign tax filings then they will need to assess the following:

  • Are there reportable foreign bank accounts meeting the threshold?
  • Is there any income generated from these bank accounts?
  • Are there reportable financial assets meeting the threshold?
  • Are there any ownership in a controlled foreign corporation that meet the reporting requirements?
  • Are there mutual funds owned in a foreign country?

If the answer to any of the above is a Yes, then the options to comply are

Streamlined Filing Compliance Procedures

  • These procedures are available for taxpayers residing outside and inside the US
  • Non-Willful conduct certification required under this procedure
  • Cannot use this procedure if a tax return is under examination
  • All taxpayers wanting to participate in this program need a valid ITIN
  • Once in this program, cannot switch to other programs
  • Penalties waived for eligible taxpayers residing outside the United States
  • 5% penalty for eligible taxpayers residing in the U.S.
  • Criminal penalties open

Delinquent FBAR Submission

  • All FBARS to be electronically filed
  • Cannot be under a civil or criminal examination to file prior year delinquent FBAR
  • Delinquent FBAR possible only if all foreign income reported and taxes paid
  • Reason for late filing needed
  • No penalty for failure to file delinquent FBARs if income from the foreign financial accounts have already been reported on the tax returns

Offshore Voluntary Disclosure Program (OVDP)

  • Purpose is to bring taxpayers with undisclosed foreign accounts, income and entities into compliance with U.S. tax laws
  • Various penalties apply to participate in the OVDP program
  • Penalty worksheet calculation to be completed. Penalties as much as 27.5%

Many countries have signed the FATCA pact with the IRS and mandatory reporting would start on these accounts from 2015/2016. One key change is a new 50% offshore penalty that applies if either a foreign financial institution at which the taxpayer has or had an account, or a facilitator who helped the taxpayer establish or maintain an offshore arrangement, has been publicly identified as being under investigation or as cooperating with a government investigation. This new penalty likely changes the calculus for taxpayers with accounts (including closed accounts) at banks that are either cooperating with the DOJ or are under investigation.

These expanded options for U.S. taxpayers underscore the IRS’s continued enforcement efforts aimed at U.S. taxpayers who have unreported foreign-source income. Taxpayers with unfiled foreign bank account reports or unreported income from offshore accounts would be wise to contact our office to discuss future strategy.