Statutorily mandated reporting between global financial institutions and their local governments regarding individual financial account information is at an all-time high and unlikely to diminish any time soon. The possibility that a foreign bank might flag a U.S. taxpayer’s lack of compliance increases each day as foreign financial institutions continue to enhance their compliance efforts in connection with both the Common Reporting Standard (CRS) and the Foreign Account Tax Compliance Act (FATCA). Therefore, it is curious that the IRS has chosen this point in time to announce the end of its 2014 Offshore Voluntary Disclosure Program (OVDP).
The U.S. government has created two complementary tools to “connect the dots” on unreported offshore financial accounts: 1) the Foreign Bank Account Report (FBAR), which has been in place since 2004, puts a responsibility on U.S. persons to “self-report” certain financial accounts, and 2) FATCA reporting, which has been rolled out slowly since 2014, puts a responsibility on foreign financial institutions (and in certain cases U.S. financial institutions) to report information about U.S. financial account holders.
FBARs, now formally reported on Form FinCEN 114 (and previously TD F 90-22.1), are initially transmitted to the Financial Crimes Enforcement Network (FinCEN), which is a separate agency from the IRS. However, FinCEN and the IRS, both departments of the U.S. Treasury, share information and collaborate on various initiatives. Additionally, the IRS has enhanced self-reporting of foreign financial accounts with its own Form 8938, Statement of Foreign Financial Assets, which collects similar information from U.S. taxpayers and is required (where applicable) to be attached to U.S. income tax returns. Thus, the IRS has two different channels of obtaining information on self-reported foreign financial accounts.
FATCA reporting is primarily the responsibility of non-U.S. financial institutions and is accompanied by a punitive withholding regime. Compliant foreign financial institutions will generally be required to annually provide the IRS the identity and certain financial information of U.S. individual account holders, U.S. entities account holders, and certain foreign entities with U.S. ownership. For most purposes, the reporting and withholding requirements became fully effective in 2017. As you might imagine, FATCA reporting has given the U.S. government a powerful new mechanism to uncover unreported offshore accounts as in most cases, every U.S. person identified through FATCA compliance should have self-reported the same financial account on an FBAR or Form 8938.
2014 Offshore Voluntary Disclosure Program
For many years, the IRS has offered to soften the blow for U.S. individuals wishing to come into full compliance with FBAR and Form 8938 reporting through the OVDP. The IRS first launched the OVDP in 2009 to encourage compliance by U.S. taxpayers who had used undisclosed foreign accounts or foreign entities to avoid paying U.S. taxes. To encourage reporting, the IRS offers potential OVDP participants lower civil penalties and a far lower risk of criminal prosecution. In fact, in cases where a taxpayer has legal offshore funds and truthfully, timely, and completely complies with all provisions of the OVDP, the risk of criminal charges can be eliminated. The 2014 OVDP builds upon the success of the previous programs while incorporating the evolving worldwide tax and information reporting obligations.
Individuals who want to become U.S. tax compliant should consider taking advantage of the 2014 OVDP before it closes on September 28, 2018, the last day to submit a complete offshore voluntary disclosure. Note that U.S. taxpayers who remain noncompliant risk a prison term of up to five years and a fine of up to $250,000 (adjusted for inflation) for tax evasion, and even up to ten years and $500,000 (adjusted for inflation) for failing to file an FBAR.
U.S. taxpayers who wish to participate in the 2014 OVDP will be required to disclose information for the most recent eight taxable years for which the return due date has already passed. Disclosure will involve submitting the following documents to the IRS:
- An Offshore Voluntary Disclosure Letter, with copies of previously filed federal income tax returns for tax years covered by the voluntary disclosure;
- Complete and accurate amended federal income tax returns with schedules that detail the amount and type of previously unreported income from foreign financial accounts or domestic sources for all taxable years covered by the voluntary disclosure;
- A completed Foreign Account or Asset Statement;
- A completed and signed Taxpayer Account Summary with a Penalty Calculation;
- Completed and signed agreements to extend the time to assess tax and FBAR penalties;
- Copies of filed FBARs;
- Copies of statements for all financial accounts reflecting all account activity for each of the taxable years covered by the voluntary disclosure; and
- A statement identifying all relevant foreign entities and accurate information returns.
It is also important to note that a participant in the OVDP must agree to be subjected to a highly punitive penalty regime. For example, the civil penalty for willfully failing to file an FBAR can be as high as the greater of $100,000 (adjusted for inflation) or 50 percent of the total balance of the foreign financial account per violation. Despite the heavy financial hit, the option for some may be preferable to risk of criminal prosecution.
Alternative Compliance Options
U.S. taxpayers who miss (or choose not to take advantage of) the September 2018 deadline may still have options to become compliant after the 2014 OVDP closes. However, these options will not offer the same level of protection from civil and criminal penalties as the 2014 OVDP. The following is a list of disclosure avenues that will remain open after September 2018:
- Streamlined Filing Compliance Procedures;
- Delinquent FBAR procedures; and
- Delinquent international information return procedures.
Streamlined Filing Compliance Procedures may be an alternative for U.S. taxpayers who failed to report income, pay taxes, and submit the required information returns on their foreign financial assets. However, only U.S. taxpayers who can certify under penalties of perjury that their conduct was non-willful are eligible to participate.
The other two avenues for disclosure do not provide a means to become compliant with income reporting requirements. Instead, a U.S. taxpayer would use the delinquent FBAR procedures and the delinquent international information return procedures to comply with information reporting:
- Only U.S. taxpayers who (i) currently comply with income reporting, (ii) have paid all the relevant income taxes on their foreign financial assets, (iii) have not previously filed an FBAR, (iv) are not presently under civil examination or a criminal investigation by the IRS, and (v) have not already been otherwise contacted by the IRS regarding their delinquent FBARs may use the delinquent FBAR procedures.
- Similarly, only U.S. taxpayers who (i) currently comply with income reporting, (ii) have paid all the relevant income taxes on their foreign financial assets, (iii) have not filed one or more required international information returns, (iv) have reasonable cause for not timely filing the information returns, (v) are not presently under civil examination or a criminal investigation by the IRS, and (vi) who have not already been otherwise contacted by the IRS regarding their delinquent information returns may use either the delinquent international information return procedures.
Additional information on how to make disclosures after September 28, 2018 is forthcoming and will be posted on the IRS website (http://www.irs.gov).
Alvarez and Marsal TAXAND Says:
The IRS’s increasing ability to uncover foreign financial assets, plus the uncertain future of voluntary disclosures may be strong encouragement for certain individuals to participate in 2014 OVDP before it closes. The time may never be riper to take advantage of this program as the gap continues to close between self-reporting (e.g., FBAR and Form 8938) and foreign financial institution reporting (e.g., FATCA). Please contact our OVDP experts at A&M if one of the above programs may be of interest to you.
 The form was required with income tax returns filed for the 2011 taxable year and later. Note there are some differences in what information and what “accounts” are required to be reported on FBARs versus Form 8938. There also minimum dollar amount thresholds for both forms. For example, FBARs are required if the aggregate maximum value of bank accounts exceeds $50,000 while Form 8938 thresholds vary from $50,000 and $600,000, depending on the filing status of the filer and whether such filer lives inside or outside the United States.