Are you in compliance with filing your FBARs and reporting income taxes on foreign earnings? If not, what are your options?
This blog will address three methods to bring you into compliance and inform you of the penalties associated with each method.
Soft Reporting:
An individual may start reporting their foreign accounts via an FBAR and report their foreign earnings on their current tax returns. If they have not dealt with previous filings, they may HOPE their returns do not spark a review of any prior filed tax returns which may have required financial reporting. If previous years are reviewed, penalties for non-filing can be significant.
An issue with the Soft Reporting Method is that it is difficult to claim non-willful failure to file if the IRS looks back at previous years. Once they call, none of the programs discussed here is an option.
Non-Willful violations — Penalty cannot exceed $16,117 per violation. Recently the Supreme Court has ruled that this penalty is per report rather than each account.
Streamline Filing:
Streamline filing is a voluntary filing for NON-WILLFUL failures to file required FBARs and not reporting the foreign income earned. This method requires filing 6 years of past due FBARs and amending three-years of income tax returns to add the foreign income that was previously omitted. Non-Willful Conduct is defined as conduct that results from negligence, inadvertence, mistakes, or a good faith misunderstanding of legal requirements.
Penalties associated with the Streamline Filing: 5% of the highest value of the FBARs reported in the six-year period and interest computed on the three-year tax return balance due compounded daily using the IRS underpayment rate.
Voluntary Disclosure Filing:
This method is reserved for those that are attempting to avoid criminal penalties and time incarcerated. With this method you must file six years of FBARs and six years of incorrect or delinquent tax returns.
Penalties Associated with the Voluntary Disclosure Filing: Typically, the balance due on the individual tax return which has the highest balance due is subject to the Civil Fraud Penalty, however the IRS in limited circumstances may assess the penalty in additional years of the six-year period.
In addition to the income tax penalty discussed above, there is a penalty for late filing of FBARs. The Civil penalties cannot exceed the greater of $161,166 or 50% of the amount in the account at the time of the violation. Criminal Penalty is a fine of not more than $250,000, or imprisonment for not more than five years, or both.
DUE TO THE POTENTIAL FOR CRIMINAL LIABILITY, ONLY ATTORNEYS SHOULD BE INVOLVED IN FILING A VOLUNTARY DISCLOSURE FOR ATTORNEY CLIENT PRIVILEGE.