What Is A “Disclosure”?
Disclosure is the act of releasing all relevant information pertaining to income and assets to the IRS. Taxpayers who don’t disclose all income and assets in both domestic and foreign accounts on annual tax returns are subject to fines and penalties.
Disclosure of Domestic Income and Assets
The IRS requires all U.S. taxpayers to disclose income and assets on annual tax returns. For individuals who fail to disclose or fail to file tax returns, the IRS allows tax amnesty through their IRS Criminal Investigation Division which allows taxpayers to make voluntary disclosures and payments to avoid criminal prosecution. The Domestic Voluntary Disclosure Program is available to individuals who have seriously delinquent tax returns and/or significant unreported income.
Delinquent Tax Returns
Taxpayers who fail to file tax returns for several years can be subject to criminal prosecution. Taxpayers with delinquent tax returns can choose to make a voluntary disclosure or file up to six years of delinquent returns. The IRS puts a six-year statute of limitations on prosecuting a person for delinquent tax returns.
Taxpayers who willfully omit significant income from their tax returns can be prosecuted for tax evasion. Most cases that involve criminal prosecution have at least $100,000 in total tax loss, not income. Cases that involve smaller amounts of loss can usually be amended for a period up to six years.
Disclosure of Foreign Accounts and Assets
The IRS requires individuals with a foreign bank or financial accounts to disclose assets each year. Such assets are typically reported by filing a Report of Foreign Bank and Financial Accounts, also referred to as an FBAR. Beginning in 2017, the deadline for filing an FBAR is the same as the deadline for filing a federal income tax return which is April 15th each year. The appropriate tax form, Form 114, must be filed electronically with the Financial Crimes Enforcement Network (FinCEN). If taxpayers miss the deadline to file, FinCEN will now grant an automatic six-month extension to file the FBAR.
According to U.S tax laws, the IRS requires U.S. citizens and resident aliens, including those with dual citizenship, to file FBARs if they have foreign assets to report and a tax liability. All foreign assets in bank accounts, brokerage accounts, mutual funds, securities, and other foreign accounts must be reported to the IRS if the total value of all financial accounts exceeds $10,000 at any time during the year. Even when a taxpayer qualifies for tax benefits, including the foreign tax credit or foreign earned income exclusion, a filing requirement generally applies. These tax benefits are not automatic and are only available if an eligible taxpayer files a U.S. income tax return.
Failure to file an FBAR for a tax liability in foreign accounts can result in civil penalties that amount to 50 percent of the total monetary balance in foreign accounts, as well as fines up to $100,000. For complex or multiple accounts that are delinquent, an FBAR attorney can oversee the filing process and negotiate with the IRS if a taxpayer is charged with criminal charges.
In addition to civil penalties, willfully failing to file an FBAR can subject an individual to criminal prosecution. Criminal charges can be filed for intentionally failing to file a tax return, filing a false tax return, tax evasion, and conspiracy to defraud the government. Any individual that’s convicted of criminal charges for non-disclosure of assets faces serious consequences.
Taxpayers face strict reporting requirements and steep penalties on foreign accounts and assets. The initial penalty is $10,000 per failure to file. After 90 days without filing, additional penalties of $10,000 per 30 days are added. Penalties can add up to $50,000 or more in some cases.
The Offshore Voluntary Disclosure Program
The IRS provides help to taxpayers who have tax liabilities on foreign accounts and assets through the Offshore Voluntary Disclosure Program (OVDP). The federal program works with taxpayers to reduce civil penalties and provide protection against criminal charges. Since non-disclosure of assets to the IRS results in very serious consequences, taxpayers with undisclosed foreign accounts and assets are encouraged to use OVDP to become compliant on taxes and avoid substantial civil penalties up to $500,000 and/or criminal charges that can include prison terms from three to ten years.
For taxpayers who face serious tax penalties and the threat of criminal charges and prosecution, an FBAR attorney can negotiate with the IRS to reduce penalties and work out an agreeable payment plan. Facing a Federal Claims Court without legal representation does not usually warrant a favorable outcome for the taxpayer. Giving a valid explanation for failure to file may provide a taxpayer temporary amnesty in some cases, but it is not guaranteed.