Foreign Bank Account Disclosure Requirements and Tax Evasion Risks

Recent amendments to federal Foreign Bank and Financial Accounts (FBAR) regulations have significant implications for anyone with an interest in or signatory authority over offshore accounts. The United States Treasury Department published final revisions of FBAR regulations earlier this year, and this legal development is a good reason to consult with an experienced tax lawyer to discuss the factors involved in compliance.

Prior to the recent publicity surrounding foreign accounts and the 2011 Offshore Voluntary Disclosure Initiative (OVDI), many taxpayers and tax advisors alike were not fully aware of FBAR reporting requirements for foreign accounts and investments. The resulting confusion, combined with enhanced IRS attention to a large source of tax revenue, has created challenges and legal pitfalls for many taxpayers.

AVOIDING CRIMINAL TAX EVASION CHARGES FOR UNREPORTED FOREIGN ASSETS

Tax examiners look for certain “badges of fraud” to determine whether to impose civil tax penalties or refer a case to the Criminal Investigation Division of the IRS. In a general sense, these include evidence of activities such as destroying records, failing to cooperate with the IRS, excessive dealings in cash, falsifying records or claiming fake dependents.

With respect to FBAR reporting requirements, the federal government has targeted three types of repeated actions that are likely to result in consideration of federal tax evasion charges if they occurred on three or more tax returns:

• Failure to file necessary forms regarding deposits of $10,000 or more in a foreign bank or institution during a given tax year
• Failure to report investment income generated by an offshore account as income on a federal income tax return
• Failure to indicate the existence and location of foreign accounts on schedule B of a U.S. taxpayer’s return

Distinctions between negligent and willful reporting failures are crucial, and prosecutors must prove beyond a reasonable doubt that the taxpayer intentionally violated a known duty. Nonetheless, the stakes are very high, as the IRS now has authority to inflict simultaneous criminal and civil sanctions for failure to comply with strict foreign account reporting provisions.

OPTIONS FOR TAXPAYERS WHO HAVE CONCERNS ABOUT OFFSHORE ACCOUNTS

Taxpayers who suspect that they have not complied with FBAR regulations and have not chosen to participate in voluntary disclosure programs that have already elapsed can discuss their options and unique circumstances with a tax representation attorney. In the most basic sense, a taxpayer has several options beyond choosing to do nothing and hope that the IRS will never detect offshore assets.

Taking no action is a gamble due to the long reach of the Fair and Accurate Credit Transactions Act (FACTA), which provides foreign financial institutions with strong incentives to report the names of all American account holders. Proactive options that a taxpayer may want to consider after consultation with a tax defense lawyer include:

• Taking steps to fully comply with FBAR reporting mandates in the future, another potentially dangerous strategy in situations involving large accounts that could draw attention when first reported
• Making a “quiet” disclosure by amending prior tax returns and paying back taxes based on the updated information with a hope of avoiding penalties (but still potentially facing criminal consequences)
• Making a “loud” disclosure by informing the IRS in writing of all past noncompliance issues, then seeking to negotiate immunity from prosecution and lower civil penalties than would have otherwise been imposed if the IRS had discovered undisclosed foreign accounts on its own

A criminal tax fraud attorney might also advise clients to consider the possibility that the IRS will institute a third round of voluntary disclosure similar to the 2011 OVDI and the Offshore Voluntary Disclosure Program (OVDP) of 2009.

EXPERIENCED LEGAL ADVICE BASED ON RECENT LEGAL DEVELOPMENTS

Changes to enforcement and tax collection priorities by the IRS give rise to difficult decisions for taxpayers with complex financial interests. An offshore assets tax lawyer can explain the most recent updates to the FBAR morass, as well as related issues involving international tax law, offers in compromise and other potential complex tax litigation challenges.