June 30 is the deadline for U.S. taxpayers, (including resident aliens) to timely report foreign financial accounts for the year ending 2012. The report form (TD 90-22.1) known as an FBAR is due if a U.S. taxpayer has control over an offshore financial account (such as a bank or brokerage account) that had an account balance of $10,000 or more at any time during the calendar year. Failure to file and for the IRS to receive an FBAR by June 30 may result in penalties which range from a warning letter (for reasonable cause) to $10,000 per year per account for “non-willful” violations (late but otherwise accurate filing not excused for reasonable cause), to the greater of $100,000 or 50% of the account balance per year per account for “willful” failure to file (knowing and intentional or willfully blind conduct) to criminal prosecution. There is an increasing likelihood that the IRS will seek the “willful” civil penalties for taxpayer’s who have failed to file FBAR for years prior to 2012 and who have failed to come forward and enter the Offshore Voluntary Disclosure Program (“OVDP”). The reasons why are as follows:
First, since 2009 there have been three (3) formal opportunities for U.S. taxpayers to come forward. There was the 2009, 2011 and now the 2012 programs. Second, offshore banks have been sending out letters to U.S. based account holders requesting that they attest to compliance with FBAR reporting and closing some accounts for non-compliance. The due diligence provisions Foreign Account Tax Compliance Act (FATCA) are now in effect and offshore banks with U.S. correspondent banking agreements are scouring their records for U.S. account holders. These banks are requesting consent from U.S. account holders to disclose information about the U.S. account holder to the IRS. Third, The Justice Department has brought actions against several offshore banks, Switzerland, Luxembourg, and Israel to compel disclosure of information about U.S. account holders. Finally, beginning with 2011 Form 1040 has specific questions on Schedule B about whether the taxpayer filed an FBAR. Yet, in spite of all of the information many U.S. taxpayers, including those who are resident aliens have refused to come forward. Some of the reasons for not coming forward are fear based, and some based upon risk/reward estimates. In each case the outcome if caught is so terrible, that it is had to imagine why anyone would refuse to come forward. However, some U.S taxpayer’s like the following examples are gamblers.
Example 1: Taxpayers are resident aliens who claim to have inherited funds in excess of $100,000 somewhat recently. The funds were kept in an offshore account and not reported for either income tax or FBAR purposes. Here are the potential results. First, a Report of Foreign Gift or Bequest was due for income tax purposes. While no estate or gift tax was due the failure to file Form 3520 when due can result in a civil penalty of between 25% -35% of the amount of the bequest, (for simply not filing). If the taxpayers filed an FBAR and Form 3520 timely there would be no penalties at all and no tax due Second, the taxpayer’s now face a civil FBAR penalty of the greater of 50% or $100,000 of the highest account balance per year. If, however, they enter the offshore voluntary disclosure program the maximum combined civil penalty is 27.5% of the highest single year account balance. While the civil penalty is costly, the “ostrich” approach is likely to be catastrophic.
Example 2: Taxpayer has an offshore corporation which is used to provide inflated or false invoices so that the taxpayer can move money offshore and deduct the payment. The taxpayer owns the company directly or indirectly (such as through a trust or nominee) but has full control over the bank accounts. The taxpayer did not File FBAR’s or attach a Controlled Foreign Corporation return (Form 5471) to his Form 1040. In this case the taxpayer faces potential criminal prosecution for both income tax evasion and willful failure to file FBAR’s. The risk of prosecution and the penalties for tax evasion (75% of evaded tax) and FBAR willfulness penalties can be avoided if the taxpayer makes a timely offshore voluntary disclosure. The cost benefit surely tilts in favor of disclosure.
Example 3: Taxpayer is considering applying for an EB-5 Visa (investor Visa). Before entering the program the taxpayer should obtain a legal opinion on how to properly comply with disclosure requirements for holdings in financial accounts and other interests. The failure to properly comply with FBAR and income tax reporting rules can be grounds for revocation of the visa. Once the EB-5 or any other visa that results in permanent resident status is issued, the FBAR and other compliance rules and penalties apply.
The decision to come forward and pay out substantial sums or not come forward and face worse outcomes may seem to present an irreconcilable choice. However, the third choice, doing nothing, or worse, furthering the efforts to hide, may lead to terrible outcomes. Human behavior being what it is, some will choose to gamble, for those who do, I wish you the best of luck.