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 a 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 agent 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 tax payers. 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.
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 complaint with the U.S. Tax Code. However, 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.