All taxpayers with income above a certain level are under an annual obligation to file a tax return and pay taxes on an annual basis. Taxpayers with significant resources and assets typically find that they must satisfy additional tax and regulatory obligations. Taxpayers who hold or who have signature authority over foreign accounts and foreign assets must disclose the existence of these accounts to satisfy their Report of Foreign Bank & Financial Accounts (FBAR) and Foreign Account & Tax Compliance Act (FATCA) obligations.
Taxpayers who have failed to satisfy these obligations have heard about the significant fines and penalties that can be imposed for FBAR and FATCA noncompliance. Furthermore, the information sharing agreements enacted to implement FATCA means that taxpayers face a higher than ever chance of identification. Therefore, many taxpayers are looking to find a path back to compliance with the U.S. Tax Code. While options exist, taxpayers must ensure that they proceed wisely and do not further compound their liability.
Quiet Disclosure Is Not Appropriate In All Circumstances And Can Lead to the Imposition of FBAR Penalties
Consider the following hypothetical situation: John Doe has held a foreign bank account located in India for the past 6 years. Mr. Doe has never filed FBAR despite having at least $400,000 in his accounts at all times. Since the balance in Mr. Doe’s account has exceeded $10,000 for all relevant years, he had an obligation to file FBAR. However, he did not file. Furthermore, Mr. Doe failed to answer the question regarding foreign accounts located in Schedule B of his tax return and did not pick up the related investment income on his U.S. Income Tax Return . However, Mr. Doe has heard that by simply filing his past FBARs along with amended tax returns, a quiet disclosure, that he can correct his past noncompliance.
Unfortunately for Mr. Doe, such an approach is fraught with risk and should not be attempted without first consulting with an experienced tax professional. If Mr. Doe was to take these actions he would likely, at minimum, be assessed a fine of $10,000 for all of the years where an FBAR should have been filed but was not (per account, per year). At a maximum Mr. Doe could face fines in excess of the offshore account balance plus face potential income tax evasion charges.
Can the Taxpayer Escape the FBAR Penalty?
In this situation where the taxpayer has completed a quiet disclosure in an attempt to correct past FBAR mistake, he or she is likely to face very serious criminal and civil penalties. While the penalty may have been reduced or avoided through use of Streamlined Disclosure or Offshore Voluntary Disclosure Program (OVDP), the taxpayer’s hasty actions have resulted in the imposition of FBAR penalties. However, “reasonable cause” can provide a means to escape liability for FBAR penalties provided that:
- Reasonable cause existed and caused the violation.
- The balance in the account at the time of the transaction was properly reported.
Here, even when the taxpayer has violated the reporting obligation, he or she may be tempted to argue that that it is impermissible to impose a penalty because he or she had “reasonable cause.” But, the taxpayer’s actions and filings must support that the failure to file was, indeed, due to good cause and that a lack of ordinary care or prudence or intent to evade tax was not the reason for the noncompliance.
In this case, Mr. Doe failed to address or answer the foreign accounts question on his Schedule B. Since the Schedule B question asks the taxpayer if he or she has “signature or other authority over a financial account in a foreign country …” Mr. Doe should have been placed on notice about the existence of some obligation relating to foreign accounts. A reasonably prudent individual would then launch at least some inquiry into the obligation and the steps required to comply with it. In fact, following the instructions on the tax return and merely turning to page B-2 of the instructions for IRS Form 1040 would show that an obligation to file FBAR exists. Mr. Doe’s failure to perform any investigation or diligence shows a lack of ordinary care. A court would be exceedingly likely to impose an FBAR penalty against a taxpayer who engaged in this type of behavior.
Facing FBAR Concerns?
As the above scenario shows, it is essential that taxpayers proceed cautiously and in an appropriate manner for their individual tax circumstances. If you have concerns about your FBAR compliance or if you have already been contacted by the IRS regarding offshore accounts the experienced tax professionals of the Tax Law Offices of David W. Klasing can help. To schedule a reduced-rate consultation to discuss FBAR, FATCA, and other offshore tax concerns call 800-681-1295 or contact us online today.
