If you are facing the possibility of an FBAR – Foreign Bank Account Reporting – audit, or criminal investigation, from the IRS, you would be wise to seek qualified international tax defense counsel immediately. As this is a potential criminal issue, the original preparer is the absolutely wrong person to approach as they are likely to be government witness number one against you should the government choose to prosecute.
FBAR is a universal concern to taxpayers who file taxes in the United States and who hold foreign financial accounts, own offshore entities or potentially own other U.S. taxable income-generating assets outside the United States. Through the FBAR filing requirements, U.S. taxpayers must report foreign financial accounts that, when added together and converted to U.S. currency, total to $10,000 or higher at any time during the reporting calendar tax year. Failure to disclose these foreign holdings for foreign information reporting and U.S. taxable income purposes may result in draconian fines and penalties in the United States, as high as 50% of the offshore funds and potential criminal tax liability if the non-disclosure / non-reporting is found to be willful.
Taxpayers found to be willfully failing to make these disclosures, face criminal prosecution at the hands of the Department of Justice and the IRS and or their state of residence. Claiming that you didn’t know about the FBAR requirements won’t necessarily help your situation. The Federal and State tax authorities are on the lookout for evidence of “willful blindness” or intentionally or with reckless negligence, failing to learn of these requirements. Because an FBAR audit can involve both assessments of additional income tax, draconian penalties and potential criminal tax and criminal foreign information reporting consequences, you are wise to hire an attorney with extensive knowledge and experience with the U.S. international income tax and offshore information reporting regulations and requirements representing you. At the Tax Law Offices of David W. Klasing, this issue often represents up to 80% of our current book of business and to date we have not had a client criminally prosecuted over this issue.
International FBAR Lawyers and Accountants
Closing the tax gap is one of the key priorities for Congress, the IRS and other government agencies involved in the administration and collection of tax. One of the largest reasons for the difference between projected tax revenue and the amount of tax actually collected is the use of offshore accounts, trusts, and entities to evade or defeat tax. In recognition of this challenge, Congress has passed a number of laws which requires U.S. taxpayers to disclose their offshore accounts & assets or face serious tax consequences and a FBAR audit with the risk of criminal prosecution.
Report of Foreign Bank & Financial Accounts (FBAR) and Foreign Account & Tax Compliance Act (FATCA) are the two main laws requiring Americans and others to disclose foreign accounts to the U.S. government. Furthermore, FATCA contains provisions that require foreign financial institutions, located in jurisdictions where an information sharing agreement is in place, to turn over account information of U.S. entities and individuals. Depending on the form of agreement in effect in the jurisdiction, this information is passed electronically directly to the IRS or through the foreign country’s taxing authority. The U.S. government is using this information to identify taxpayers who are not compliant with their FBAR or other offshore disclosures and to look for offshore income tax evasion. In short, the risk of facing serious consequences due to undeclared offshore accounts has never been greater.
How Can A Serious Offshore Tax Situation Develop?
Most people do not intend to fail to meet their tax or information filing obligations. In light of the serious offshore and FBAR penalties that exist, few people would leave their taxes in an unfinished or incomplete state. However the people who do intentionally endeavor to conceal their offshore accounts and income must be concerned about the possibility of criminal tax charges. While many who are noncompliant are not likely candidates for criminal charges, all people who are noncompliant with their FBAR and other offshore account filings face the onerous offshore penalties that can be imposed upon conviction.
Consider a young professional who immigrated to the United States in 2007. When the professional came to the United States he had a bank account in China which he kept to facilitate sending money back to his family. As the professional’s success in the United States grew, so did his domestic and foreign bank accounts. In 2010, the professional’s Chinese bank account balance exceeded $10,000 for the first time thereby giving rise to an FBAR disclosure obligation. By 2015, the balance in the account had reached more than $400,000 with a modest yearly income from interest. The professional has never filed FBAR or disclosed the account.
Information sharing through FATCA is likely to reveal the existence of the professional’s account. Furthermore, the professional’s recent immigration status coupled with his relatively high income make him a more likely target to be selected for audit.
FBAR related audits can lead to incredibly harsh financial penalties when the government agency believes that the compliance failure was willful. First, the underpayment of tax can be penalized similarly to that of domestic tax fraud or evasion. That is, the taxpayer will pay tax on the concealed income and additional penalties including the 75% civil fraud penalty. However, in addition to the typical audit penalties, the taxpayer can also face up to a 50% FBAR penalty for each year, and each account that was not disclosed. In most FBAR compliance situations involving willfulness, the fines and penalties sought regularly exceed the original account balance.
Can the Failure to File FBAR Lead to a FBAR Audit?
In today’s new global banking regime established under FATCA that emphasizes disclosure and information sharing, the risk of having an undisclosed account detected has never been greater. Information from foreign nations is being used by the IRS to identify taxpayers who fail to include sources of foreign taxable income on their U.S. income tax filings. In short, the IRS is expanding its use of information matching. The agency is using these and other protocols and practices to identify and pursue noncompliant taxpayers. Your failure to file FBAR and disclose all sources of income on your income tax return can significantly increase your risk of facing a FBAR audit.
In the not so distant past, utilizing foreign banks or financial accounts was a patently illegal but often successful way of shielding taxable income and hiding offshore assets and holdings from the IRS and from U.S. creditors. For many decades, this practice was largely ignored and for the most part unenforced. By utilizing foreign holdings, investors would diversify their finances and simultaneously protect their holdings from a significant financial catastrophe in the United States. A couple of decades ago, the risk of having the IRS discover this type of account was almost unheard of (not that anyone in our office ever counseled anyone to do this….)
In modern times, though, Under FACTA, the IRS has numerous tools at its disposal to help it track down income and assets in these foreign jurisdictions. More than 100 different foreign countries have signed agreements with the United States to report any information they have regarding accounts that American taxpayers hold in their respective countries. This means that you have little to no chance of maintaining a secret bank account in a foreign jurisdiction at present.
How to Correct FBAR Problems before an Audit Occurs
The best way to fix past FBAR and offshore account issues is to be proactive and to make a timely entry into Offshore Voluntary Disclosure or Streamlined Disclosure. Entry into these programs can mitigate the potential tax consequences you face and allow you to become compliant with the U.S. Tax Code. However, an additional delay can result in ineligibility for reduced penalties because an investigation into one’s offshore activities will make one ineligible. Furthermore, if one’s foreign bank is identified on the Foreign Financial Institutions or Facilitators List prior to entry into the program, an increased offshore penalty of 50% rather than 27.5% may apply.