FBAR Enforcement, What’s Next

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September 9, 2011 is the last date for taxpayers to submit requests to participate in the IRS Second Supplemental Offshore Voluntary Disclosure Initiative (OVDI). I have handled many OVDI filings and for some the program is a clear opportunity to avoid very severe outcomes if they do not enter the program. The lucky taxpayers who meet all the program requirements will avoid criminal and civil sanctions. But what about the taxpayers who really have no criminal liability, that is the risk of prosecution is minimal, and who chose not to enter the program? What should be done for those who chose to enter the program and ultimately “opt out” (OVDI Frequently Asked Questions “FAQ” 51.1?)

First, not all taxpayers should have entered the OVDI program. If a taxpayer has reported their foreign financial income on their income tax return, then the proper approach is to file previously unfiled Foreign Bank Account Reports (FBAR’s) with a “reasonable cause” statement the makes clear all income from foreign financial sources has been reported. Reasonable cause in this case is limited to the act of failing to file the form, but the failure is excused because the income has been reported (FAQ 17). Reasonable cause may not necessarily include circumstances where the income was not reported. There still is the possibility that a non-willful penalty of $10,000 per unfiled year will be assessed for late filings after September 9, 2011 (OVDI FAQ 5).

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