The Internal Revenue Code requires individuals and business with interests in foreign bank accounts to report them on their tax returns. Failing to comply may result in serious criminal and civil penalties. The Internal Revenue Service administers the Offshore Voluntary Disclosure Program through which individuals and businesses avoid criminal liability by reporting accounts that they have failed to previously disclose. An experienced OVDP attorney might help to avoid the criminal penalties while also working to reduce the associated civil penalties for his or her clients who have failed to report their interests.
Report of Foreign Bank and Financial Accounts
Individuals and businesses with signatory authority or financial interest over foreign bank accounts are required to file the Financial Crimes Enforcement Network Form 114, which is also called the Report of Foreign Bank and Financial Accounts, or FBAR. Those with foreign accounts that have grown to $10,000 or more during any portion of the year are required to report their interests in the required form. The potential penalties for failing to do so are severe.
The Disclosure Responsibility
Businesses and individuals holding signatory authority over a foreign bank account or holding an interest in one meeting the balance requirement are required to report it using Schedule B of the 1040 income tax return. They may do so by going to part III and checking a box on line 7a. Then, they must fill out Form 8938 where they disclose the account’s balance along with additional information if the total balance exceeds $50,000 or more on the last day of the year. If the account is greater than $75,000 on any day during the year, Form 8938 is also required even if the balance is lower than $50,000 on the final day. People may not get extensions to file these forms, and they must be filed no later than June 30th of each year. People who do not check the appropriate box and submit the required forms may be subjected to serious penalties.
Failures to file the required FBAR and additional forms may result in penalties that depend on whether the failure is deemed to be willful or non-willful. The civil penalties for violations that are non-willful include the following:
- A fine of up to $10,000 per year during which the violation occurred
- Accuracy penalties
- Back taxes
Willful violations may bring fines of up to $100,000 or 50 percent of the aggregate values of the foreign accounts in addition to the interest, back taxes and accuracy penalties. Some individuals and businesses may also be criminally prosecuted in addition to the civil fines and penalties. When businesses do not report their interests, the IRS may hold the owners responsible.
Resolving the Reporting Problem with the Offshore Voluntary Disclosure Program
The Offshore Voluntary Disclosure Program is offered by the IRS for people and businesses who have violated the FBAR and other foreign disclosure requirements. People and businesses who participate in the program are not criminally prosecuted. They must agree to allow the IRS to go back eight years to assess taxes on the value of their foreign accounts rather than the six years that are statutorily allowed. An OVDP attorney may help them with obtaining lower penalties for every year in which a violation occurred.
Opting Out of the OVDP
If the violations were not willful, some taxpayers may instead decide to opt out of the OVDP. If they can demonstrate that they have not had criminal tax convictions in the previous 10 years or have had FBAR penalties that were previously assessed against them, they might be able to mitigate their penalties. An important factor is that the money in the foreign bank accounts must not have come from criminal sources or activities. The taxpayers must not have been subjected to penalties for civil fraud due to underreporting their incomes during the years of the violations. Finally, people who opt out of the OVDP must cooperate with the IRS.
While some taxpayers may choose to continue on and not report their foreign bank accounts, doing so may not be a good idea. The IRS has taken an interest in uncovering foreign bank accounts. Some taxpayers might opt to make quiet disclosures by filing amended returns for the prior years and reporting the bank accounts, but they might still be criminally prosecuted.
Failing to report interests in foreign bank accounts may lead to severe civil and criminal penalties. The OVDP might help to protect some taxpayers from criminal prosecution while also allowing them to reduce the penalties they face. If the violations were not willful, they may want to investigate whether participating in the program is in their best interests. An experienced OVDP attorney may advise clients about whether the OVDP is the best option for them or if they might consider opting out.