It is again that time of the year, where the U.S. tax season is blooming, and where we, at Pearl Cohen are reminding you of your Foreign Bank Account Reports (FBAR) filing requirements. We also thought it would be helpful to provide you with important information that may assist you, in case you have not filed FBAR (or tax returns) in prior years and would like to become compliant going forward.
NOTE, THIS YEAR THE DEADLINE FOR FILING FBAR IS APRIL 18, SAME DATE THE U.S. TAX RETURNS ARE DUE. HOWEVER, THE FINANCIAL CRIMES ENFORCEMENT NETWORK (FINCEN) ANNOUNCED LAST MONTH THAT IT GRANTED TAXPAYERS, FAILING TO MEET THE FBAR ANNUAL DUE DATE, AN AUTOMATIC EXTENSION TO FILE, UNTIL OCTOBER 15.
As set forth by the Internal Revenue Service (IRS), below are the details referencing the actions that a U.S. person must take to address an unfiled FBAR. Please note that there are specific stipulations that must be met to be required to file FBAR's, and although they are listed in the first paragraph below, it is advisable to seek counsel's assistance to make sure the requirements and procedures are fully satisfied.
Every U.S. person, either citizen or resident alien, is required to file an FBAR if the following requirements are met:
1. The U.S. taxpayer has a financial interest or a signature authority over at least one foreign account, and
2. This foreign account is an aggregate amount exceeding $10,000 at any time during the calendar year (this can be either a single account or many).
Once established that a taxpayer meets these requirements, and it is recognized that this filing has been neglected, the taxpayer must determine which of the three programs he or she identify with. Please take the time to read this over and determine which program best meets your circumstance. We are happy to answer any question you may have, by reaching out to any of us.
1. Delinquent FBAR Submission.
This submission process is for U.S. taxpayers who
(i) have not been contacted by the IRS about non-submission,
(ii) are not under criminal investigation by the IRS, and
(iii) have not contacted the IRS about their lack of submission.
This program requires that the individual files the necessary delinquent FBAR s, along with a reasonable cause statement explaining their tardiness. The statute of limitations for any FBAR penalty is 6 years, and it begins running on the filing date that the FBAR is due. The reasonable cause statement must certify that the taxpayer was not engaged in tax evasion, and further explain why their non-submission was reasonable. Each delinquent FBAR application that requests reasonable cause must have its own individualized statement and must follow specific guidance or it may be challenged by the IRS.
Delinquent FBAR submissions are not subject to penalty if the taxpayer reported all the income related to their foreign financial account within their U.S. annual tax filing, and if each delinquent FABR application had a corresponding reasonable cause statement.
One can file the Delinquent FBAR Submission online using BSA E-Filing through the following link: http://bsaefiling.fincen.treas.gov/main.html
Delinquent FBAR Submissions can either be submitted directly online as a one-time submission (prepared in one sitting) or can be done in PDF form so that the taxpayer can work at their own pace and submit when ready. The taxpayer is given these options via the link referenced above and can submit both electronically when completed.
2. Streamlined Offshore Procedure
The Streamlined Offshore Procedure falls into two subcategories domestic and foreign.
To be eligible for the Streamlined Foreign Offshore Procedures, the taxpayer
(i) must be a citizen or permanent resident of the United States, and
(ii) must meet the non-residence requirement.
The non-resident requirement includes U.S. citizens and any lawful permanent resident (including green card holders) who, for the past three years, did not maintain a U.S abode and who were physically outside the United States for at least 330 full days. The procedure to address the negligent filing set forth for taxpayers who meet these prerequisites is as follows:
(i) file all delinquent or amended tax returns for the previous 3 years, and
(ii) file any delinquent FBAR's from the previous 6 years.
If U.S tax returns have not been filed previously, then the taxpayer must file an accurate delinquent tax form using Form 1040. If U.S. tax returns have been filed, then the taxpayer must submit an amended tax return using Form 1040X. In this procedure, there is no penalty imposed on the taxpayer. Please note that the taxpayers conduct in not filing must have been non-willful.
To be eligible for the Streamlined Domestic Offshore Procedure, the taxpayer must
(i) be a resident of the United States,
(ii) have filed a U.S. tax return within the last 3 years, and
(iii) have failed to report gross income from a foreign account.
The failed report of gross income means that the taxpayer neglected to pay their U.S. foreign tax, and failed to file their FBAR. It must be noted that to be eligible, the individual's conduct must have been non-willful. Taxpayers may not file delinquent tax return using this procedure.
The guidelines set forth for taxpayers who meet these prerequisites, and ultimately need to submit their delinquent FBAR are as follows:
(i) file all amended tax returns for the previous 3 years,
(ii) file any delinquent FBAR's from the previous 6 years, and
(iii) pay a penalty, which amounts to a five (5) percent charge of the highest valued foreign account.
The five percent penalty is referred to as the Miscellaneous Offshore Penalty and is charged to the past six years of delinquent filing. However, there is an exception to this six-year window. There are instances where the three-year tax return period does not completely overlap with the six-year standard of FBAR delinquent submissions. For instance, if your tax period runs from 2014 to 2016 and the FBAR period is 2010-2015, and the FBAR for 2016 has not passed, then the penalty imposed is on seven years of the highest aggregated value of your foreign finances.
3. Offshore Voluntary Disclosure Program.
This program is designed as a voluntary disclosure for taxpayers with potential criminal liability because their omission to submit FBAR was willful. The program is designed to help taxpayers resolve penalty obligations and protect them from criminal liability. If a taxpayer truthfully, accurately, and without delay, participates in this program, the IRS will recommend that the taxpayer not be subjected to criminal prosecution. Taxpayers must voluntarily disclose the most recent eight-year period of delinquent filing. They are subjected to an offshore penalty of 27.5% based on the highest years' aggregated value during the disclosed period. If the taxpayer has multiple foreign accounts and the highest value of the assets change per year, then a single penalty is calculated from the aggregate of assets from each year. A 50% penalty will be applied if a financial institution or another party whom is holding the taxpayers account gets cited for an IRS investigation prior to engagement in this program. This information is based on the current guidelines set forth by the IRS that may be changed, possibly on a retroactive basis.