What are the Pitfalls of Undeclared Foreign Financial Accounts

What are the Pitfalls of Undeclared Foreign Financial Accounts?

The Pitfalls of Undeclared Foreign Financial Accounts

In recent years, the Internal Revenue Service has significantly increased the enforcement of foreign accounts compliance for U.S. Taxpayers with undisclosed foreign accounts, assets, investments, and income. Typically, when Taxpayers have unreported foreign money, they have several opportunities to get back into offshore compliance with minimal penalties or even a penalty waiver. Rarely are Taxpayers subject to willfulness penalties and even more rare is the risk of criminal penalties (beware of fear-monger tax lawyers who falsely claim that your non-compliance will result in criminal FBAR or FATCA penalties).  While there are some pitfalls to having undisclosed foreign accounts, assets, investments, or income – there are also effective ways to minimize the impact and avoid any collateral damage. Let’s review five (5) important pitfalls of undeclared foreign financial accounts.

First, Which Tax Forms are Required for Foreign Accounts?

Each year, US taxpayers are required to report their foreign accounts, assets, investments, and income on a myriad of different international information reporting forms, such as:

• • • FBAR

    • Form 8938 (FATCA)

    • Form 3520

    • Form 3520-A, and

    • Form 5471

FATCA Bank Letter Leads to IRS Undisclosed Foreign Account Audits

FATCA is the Foreign Account Tax Compliance Act.

For Taxpayers who have undisclosed foreign accounts, there is the risk that the Foreign Financial Institution where the account is located will report the Taxpayer to the IRS. That is because over 110 foreign countries and hundreds of thousands of Foreign Financial Institutions actively report U.S. account holder information to the IRS via FATCA. If the IRS receives this information, the Taxpayer may become subject to a reverse eggshell audit.

FBAR Audit or Examination

When it comes to undisclosed foreign accounts, the Internal Revenue Service has directed much of its focus on FBAR non-compliance  The IRS has stated that it will significantly increase the number of U.S. Taxpayers who will become subject to FBAR audits and examinations. Even though the FBAR form is not technically an IRS form, FBAR non-compliance is enforced by the Internal Revenue Service. The failure to properly and accurately file timely FBARs may result in significant fines and penalties. The IRS knows that many Taxpayers have failed to file FBARs going back several years and have not voluntarily disclosed their foreign accounts, assets, and investments through the IRS offshore disclosure programs — which is why the IRS is increasing the number of FBAR audits in the coming years.

Willful or Non-Willful

When a Taxpayer has undisclosed foreign financial accounts and is penalized by the IRS, chances are the penalties will be civil and not criminal. Civil penalties can be broken down further into willful and non-willful penalties. While non-willful penalties such as non-willful FBAR penalties are based on the non-filing of the form ($10,000 per year, adjusted for inflation), willful penalties are based on the value of the unreported foreign financial accounts.

Fines and Penalties

The fines and penalties for undisclosed foreign financial accounts can vary extensively depending on the type of form the Taxpayer was required to file, how many years they are non-compliant, and whether their non-compliance was willful or non-willful. To minimize and even eliminate FBAR penalties, the IRS has developed several offshore amnesty programs to assist Taxpayers with safely getting into compliance.

Criminal Investigation

Some Taxpayers with undisclosed foreign financial accounts may become subject to criminal penalties – but it is very uncommon. While a Taxpayer may potentially be subject to criminal penalties for failing to disclose their foreign accounts, it is not very likely and typically only happens in situations where there are other criminal tax violations or crimes committed such as money laundering, fraud, tax evasion, etc.

Late Filing Penalties May Be Reduced or Avoided

For Taxpayers who did not timely file their FBAR and other international information-related reporting forms, the IRS has developed many different offshore amnesty programs to assist Taxpayers with safely getting into compliance. These programs may reduce or even eliminate international reporting penalties.

Current Year vs. Prior Year Non-Compliance

Once a Taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, Taxpayers should consider speaking with a Board-Certified Tax Law Specialist who specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties. 

Need Help Finding an Experienced Offshore Tax Attorney?

When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for Taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting. 

*This resource may help Taxpayers seeking to hire offshore tax counsel: How to Hire an Offshore Disclosure Lawyer.

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure.