Congress wants money. That’s why it has now instituted a second reporting requirement for assets in foreign accounts. This increases the penalties for reporting non-compliance. Part 1 of this blog entry introduces some of the details about that. Part 2 then draws together seven practical implications for persons, trusts, partnerships, and the like with assets in foreign accounts.
There are now two reporting requirements for U.S. citizens with foreign accounts, one under the Bank Secrecy Ac (BSA) and one under the Internal Revenue Code (IRC).
Two years ago Congress introduced Foreign Account Tax Compliance Act (FATCA), which was part of the Hiring Incentives to Restore Employment Act (HIRE). Why did Congress do this? Congress wants money, thus it is pushing for taxpayers with foreign accounts to comply with disclosure requirements. Basically, FATCA added some changes to the Internal Revenue Code (IRC), creating a new reporting duty for citizens placing assets in foreign banks. FATCA added Section 6038D to the IRC.
According to reviewing authority, the “potential effect on U.S. taxpayers with foreign accounts and assets is hard to overstate. U.S. taxpayers and their CPAs will quickly realize that, as a result of FATCA, the costs of reporting their foreign activities to the IRS have increased, as there are additional disclosures.”
Before FATCA introduced the new IRC section, IRC §6038D, the disclosure duties were done using form TD 90-22.1, otherwise known as “Report of Foreign Bank and Financial Accounts” (FBAR). The FBAR disclosure duty was created by the Bank Secrecy Act (BSA), not the IRC.
Thus, formerly, for the government to collect a penalty for one’s failing to report his or her foreign assets to the U.S. government, a long civil proceeded was required. No longer. The IRS has its own collection power. The significance of this is that it is now easier for the government to collect a penalty for non-reporting.
IRC §6038D requires that all U.S. persons, individuals, corporations, partnerships, LLC’s and trusts, provide timely information regarding their foreign accounts, otherwise a $10,000 penalty will result for every month it is late (subject to a certain maximum penalty). More exactly, it requires:
(c) Required information.–The information described in this subsection with respect to any asset is:
26 U.S.C.A. § 6038D.
The threshold reporting duties for FBAR and FATCA differ. The FBAR requires that U.S. persons with a financial interest, signature authority, or other authority over foreign financial accounts report their assets if at any point during the year–even if only for one day–the aggregate value of all such foreign accounts is greater than (or equal to) $10,000. FATCA, through IRC § 6038D, imposes a reporting duty for “specified foreign financial assets” only when the aggregate value exceeds $50,000.
Part 1 basically informs the reader that the U.S. government is serious about wanting persons report their foreign assets. This Part draws together the implications of that.
The first thing to realize is that most of the popular foreign banks, like various Swiss banks, which historically have been havens of secrecy are not so secret anymore. After years of offering clandestine banking services, the Swiss have yielded to the IRS. Now, what is happening is that Swiss and other foreign banks are giving up the names of their clients to the IRS, and even foreign banks themselves are being indicted by the U.S. for helping people engage in tax fraud. (We wrote about this in an earlier blog entry, here: Voluntary Disclosures Program & Swiss Accounts ).
If your hope is that your assets will not be discovered, you are playing with fire. Here are seven practical implications regarding the government’s redoubled efforts to crack down those hiding assets overseas:
All of one’s worldwide income must be reported to the IRS on your income tax return. “Worldwide income “includes interest, wages, dividends and all other income. Tax lax couldn’t be clearer about what must be included: ” gross income means all income from whatever source derived.” IRC §61(a). Schedule B has a specific box asking whether you have a foreign financial account.
It’s not enough to disclose your assets on your tax return. As Part 1 of this blog entry pointed out, filing a tax return is insufficient for reporting purposes. You must also comply with FBAR and FATCA/IRC § 6038D.
The penalties for non-compliance are steep–very steep. It may include jail time. If you decide not to comply with the reporting obligations, the penalties that may be exacted upon you are steep. A tax return is signed under the “penalties of perjury,” thus even failing to check the Box on Schedule B is sufficient to constitute tax evasion or tax fraud.
There is a 75% penalty for civil fraud, and a 20% penalty for incorrect reporting. In addition, there are the FBAR penalties: $10,000 for each non-intentional violation. This means, “I didn’t mean to” is not a defense. A willful violation may carry a penalty upwards of $100,000 or half of the amount in the foreign account. And each year there is a new violation, and new fines assessed.
Further, filing a false return (e.g. failing to check the box on Schedule B) is a felony, punishable by prison up to 3 years and a fine of $250,000. If found guilty of tax evasion the 3 years increases to 5 years.
The IRS can investigate you for a fraud committed 25 years ago. Even if the fraud is never discovered, the mere fact that it might be will cause sleepless nights for 25 plus years. It’s not worth it.
You May Avoid the Penalties Using a “Voluntary Disclosure.” A voluntary disclosure is where you reveal to the IRS your foreign accounts before they find them. It often results in a substantially lesser penalties, and no jail time. . For more on voluntary disclosures, read “The Solution” on this page: Tax Evasion Fraud Representation. For more on voluntary disclosures and FBAR compliance, visit our Q&A page for this, here: FBAR Compliance and Disclosure FAQ.
You Have A Quiet Disclosure Option, too. A voluntary disclosure is deemed “noisy,” since it requires telling the IRS’s Criminal Investigation Division of your accounts. By contrast, “quiet disclosures” do not do this. Instead, it involves filing amended tax returns for past years. For more, see “Going Quiet”, here: IRS will soon be able to detect previously undisclosed foreign accounts.
Future Compliance Only Is Not Enough. Some people think that if they comply with their reporting duties on a forward-going basis that will be sufficient to get the IRS off their back. Not so. As mentioned above, the IRS may explore into a taxpayer’s history in perpetuity if a return was never filed. Competent legal counsel can help you advise you on your options.
You May Have Other Options. Each case is unique and it’s impossible to list all possible outcomes and options in a cookie-cutter fashion. After hearing the specifics of your case, we can inform you of your legal options.
Many of my clients have found themselves with foreign account troubles. This is understandable, but the IRS is not in the business of being lenient. If you are a foreign account holder who has not complied with the disclosure duties, you need competent legal counsel. Due to the complexity of the intersection of taxation and criminal law, few attorneys are competent to handle these sorts of controversies. Yet, this is precisely what our Office does. Let us help you. You can visit our homepage.