Maintaining a foreign bank or other financial account is not illegal. Such accounts are increasingly common, as the globe shrinks. However, in the case of U.S. citizens or residents (and certain non-residents), failing to report that the account exists can be illegal.
As tax filing day nears, the Internal Revenue Service (IRS) recently published a reminder for U.S taxpayers with specified foreign accounts that they are required to file a Form 114, Report of Foreign Bank and Financial Accounts (FBAR). Generally, the FBAR is an annual report required under the Bank Secrecy Act that must be filed by U.S. taxpayers—whether individuals or entities—with an interest in, or signatory authority over, offshore accounts with a value above $10,000 at any point in the year. The due date for the FBAR for foreign accounts held during 2015 is June 30, 2016. This form must be filed electronically through the Financial Crimes Enforcement Network (FinCEN), which is part of the Department of Treasury. There are no extensions for filing an FBAR.
U.S. citizens, resident aliens, and certain non-resident aliens also must report specified foreign financial accounts on their federal income tax returns on IRS Form 8938. Form 8939 is required to be attached to the federal income tax return of a U.S. person with a foreign financial account if the aggregate value of that person's foreign accounts exceeds certain thresholds—typically, $50,000. Because it must be attached to a federal income tax return, the filing due date for Form 8939 is different than the June 30 filing due date for the FBAR.
There is even more. All U.S. taxpayers with foreign accounts are required to "check the box" on their federal income tax returns, even if they do not have to file an FBAR. For an individual taxpayer who held a foreign account in 2015, this box appears on Part III of Schedule B of their individual income tax return, IRS Form 1040, which asks, "[a]t any time during 2015, did you have a financial interest in or signature authority over a financial account (such as a bank account, securities account, or brokerage account) located in a foreign country?" If the answer is "yes," the return then also asks whether "you [are] required to file FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR), to report that financial interest or signature authority?" An incorrect answer, if provided willfully, can form the basis for criminal prosecution.
The rules can get complicated quickly. Depending on the particular facts, a U.S. taxpayer with foreign accounts may have to file other IRS forms reporting those accounts as well—particularly if the foreign accounts are held through partnerships or other entities.
These reporting requirements for U.S. taxpayers' foreign financial accounts have been the subject of a historic and sustained enforcement campaign coordinated by the IRS and the U.S. Department of Justice (DOJ). A willful failure to make a required reporting of a financial account is a crime and can involve substantial monetary penalties, as well as possible criminal prosecution. Even a failure that is not willful can result in significant civil penalties and unwelcome IRS scrutiny. This multi-year enforcement campaign has involved numerous prosecutions of taxpayers, professionals, and financial institutions, and has led to an extensive program involving many Swiss banks entering into non-prosecution agreements in exchange for paying heavy monetary penalties and cooperation with the U.S. government regarding their former U.S. clients."
More recently, the DOJ has made clear that it intends to pursue accounts and institutions beyond Switzerland—as evidenced by the March 2016 guilty pleas of two Cayman Islands firms, which admitted that they conspired to help U.S clients hide more than $130 million in offshore accounts and have agreed to cooperate with the U.S. government. This extended enforcement campaign has yielded an enormous amount of data for the IRS and the DOJ, from sources as diverse as cooperating taxpayers, cooperating banks, foreign governments, and self-described whistleblowers. This data will serve only to fuel and perpetuate the government's crackdown on undisclosed foreign financial accounts.
As a result of this enforcement campaign, more than 38,000 U.S. taxpayers who had neglected their compliance requirements—including citizens, green card holders, and other permanent U.S. residents—have entered the various versions of the IRS Offshore Voluntary Disclosure Program (OVDP) since 2009. A successful voluntary disclosure involves filing delinquent FBARs and amended returns, payment of taxes and associated penalties, and an agreement by the IRS to not recommend criminal prosecution to DOJ. Moreover, approximately 20,000 additional taxpayers have participated in the more recent Streamlined Filing Compliance Procedure, announced in 2014, that allows qualifying participants to file delinquent FBARs and amended returns for a shorter period of time than required by OVDP and pay reduced penalties—but only if they can certify that their prior non-compliance was "non-willful."
Part of the reason that the voluntary disclosure programs have attracted so much participation is the potentially draconian civil penalties that may be imposed for the willful failure to file an FBAR or the willful filing of a false FBAR. These penalties can be as large as 50 percent of the entire account balance for every year of violation. Given a six-year statute of limitations, stacked civil penalties could equate to three times the account balance. The IRS has stated that these programs together have led to the collection of more than $8 billion in taxes, penalties, and interest. Although the OVDP and Streamlined Program remain options for attaining tax compliance, government officials have made clear that they will be scrutinizing in particular claims of non-willful behavior, especially as time goes on. Further, the government's ability to learn of foreign accounts will continue to be enhanced by third-party reporting of offshore accounts held by U.S. taxpayers, as required by the Foreign Account Tax Compliance Act and numerous intergovernmental agreements between the United States and foreign countries.
The increasing practical difficulty of attempting to keep offshore accounts private was highlighted by the recent worldwide publication of more than 11.5 million confidential documents held by a law firm in Panama and leaked to the press. The documents allegedly describe efforts by individuals from all over the globe to hide assets in foreign accounts.
