May Foreshadow a Tougher Approach to Offshore Noncompliance
The obligation to file a Report of Foreign Bank and Financial Accounts (FBAR) has existed since the 1970s via the Bank Secrecy Act, but the regulation was rarely enforced until concerns over the tax gap began to dominate discussions in Washington in the late 2000s. The obligations to file Foreign Account Tax Compliance Act (FATCA) arose in 2010 and has ushered in a new era of intergovernmental agreements that has eroded and largely eliminated the expectation that any foreign account is truly secret.
The IRS and Department of Justice recognized that the strict enforcement of FATCA and FBAR filings represented a major shift for taxpayers and the global banking system. As such, they have permitted a period of adjustment so that taxpayers could bring their financial affairs and offshore accounts not compliance with the new regime. This included the ability to utilize the Offshore Voluntary Disclosure Program (OVDP) or Streamlined Disclosure programs to come back into compliance while simultaneously facing reduced or no penalties and other benefits. However, in light of the continually increasing flow of offshore tax filings, this window of opportunity may soon close.
Record Numbers of FBAR Form FinCEN 144 & FATCA Form 8938 Reported
According to IRS statistics, a record number of FBAR filings were filed with FinCEN in 2015. In fact, 1,163,229 were filed during the reporting year. This represents an increase of 8% over the previous year. Furthermore, FBAR filings have grown at an average rate of 17% during the previous five-year period.
Filings to satisfy a FATCA obligation have also increased steadily since the filing obligation’s debut in 2010. More than 300,000 FATCA Form 8938s were filed in 2010. This represents an increase of more than 50% from the form’s first year in 2010.
What Do the Increased Filing Levels Mean for Taxpayers Who Still Have Secret Offshore Bank Accounts?
The continually increasing numbers of filings mean that more and more taxpayers are receiving the message that both FBAR filings and FATCA filings are not only important but also an essential part of maintaining one’s compliance with financial reporting obligations. This means that taxpayers are increasingly responsive to and comfortable with the new enforcement regime that strictly requires the disclosure of global assets. This may mean that the IRS may soon make terms of its voluntary disclosure initiative less favorable to the taxpayer.
This action would not be without precedence and the IRS has indicated that it reserves the right to make changes to the programs. In fact, the 2011 OVDP program was less favorable than the initial 2009 terms. Furthermore, in 2014, the IRS made drastic changes to the 2012 program that resulted in less favorable results for taxpayers. The 2014 changes to the OVDP program included the establishment of a new 50% penalty for taxpayer’s whose foreign financial institution was under investigation or deemed as a foreign facilitator. Now that it is becoming clear that a large portion of the public has received the message regarding the necessity of disclosure and is taking action to do so, the IRS may soon revise the programs again to create a less favorable result than current rules would allow.
What Actions Should Taxpayers with Undisclosed Offshore Accounts Take?
If you still have undisclosed offshore bank accounts and have not been contacted by the IRS, you should consider yourself lucky because information sharing agreements, John Doe lawsuits, and other endeavors like the Swiss Bank Program have significantly increased the likelihood of offshore account identification. If you still have these accounts, your first step should be to speak with a tax attorney as soon as possible.
You should seek a tax lawyer and not an accountant because if the IRS or DOJ should decide to allege willfulness or criminal actions, only the attorney-client privilege is sufficient to protect the disclosures you made. You should take this action as quickly as possible because coming under investigation or the filing of charges against you will result in ineligibility for OVPD and other programs that can reduce penalties while permitting you to come back into compliance. However, prudent individuals do not attempt an OVDP or Streamlined filing without the advice of an experienced attorney because a botched or inappropriate filing can result in serious consequences.
If you are concerned about your legal and tax liabilities from undisclosed foreign accounts and assets, contact the Tax Law Offices of David W. Klasing today. David is an experienced, dually licensed attorney and CPA who has helped people in Los Angeles, Orange County, and expatriates living throughout the world address their international tax and foreign disclosure obligations. To schedule a reduced-rate consultation call us at 800-681-1295 today or contact us online.
