The Criminal Tax Division of the U.S. Dept of Justice (DOJ)is taking the position that when a taxpayer has “willfully” failed to file a Report of Foreign Bank or Financial Account, an FBAR, and has in addition filed false income tax returns, it will not recommend a probationary sentence as part of a criminal plea agreement. The rationale is that there have been 3 offshore voluntary disclosure programs, 2009,2011 and 2012, which gave and, in the case of 2012 continue to give, taxpayers an opportunity to come forward without prosecution. In addition the DOJ is requiring penalty of 50% highest single year account balance for the offending years. The DOJ will also require the taxpayer to amend income tax returns and pay the income tax, civil penalties and interest on the unreported income. The civil negligence penalty is 20% of the tax, or 75% of the tax if civil fraud is asserted.
Contrast the combination of criminal and civil penalties with the opportunity afforded by the 2012 Offshore Voluntary Disclosure Program which requires an FBAR penalty of 27.5 % of the highest single year account balance if above $75,000 (or lesser penalties) and no criminal charges and when appropriate the choice is clear. The issue of course is having once entered the OVDP should a taxpayer consider “opting out”.
The decision to “opt out” is based upon whether the combination of potentially applicable criminal and civil penalties are worth the risk and whether the financial accounts are the sole “tax non-compliance assets”. The 27.5% penalty is calculated based upon what are called “tax non-compliance assets” which include the sources of account funding and the assets acquired with unreported foreign account. In IRS FAQ 51.1-51.3 the reasons to “opt out ” are further illustrated.
In considering whether there is a “reasonable cause” defense to a potential willfulness claim the fundamental question is whether the taxpayer had a competent legal opinion which involved a substantive interpretation of the law. Such an opinion can be relied upon if in writing and is based upon full disclosure of all pertinent facts. In the case of Green Card holders an opinion on what assets are subject to disclosure (meaning reporting) on an FBAR or Statement of Foreign Financial Assets (Form 8938) or whether other information returns are due can or extreme importance. A well written legal opinion can be the turning point in any “willfulness” penalty case, but in cases where an “opt out” may be considered or in cases where future immigration status may be at risk, legal opinions can be the taxpayers saving grace.