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IRS cracks down on willful, eases up on non-willful FBAR evasion

Today was the extended filing deadline for U.S. citizens who lived abroad on the regular tax due date for 2014 returns. You still have until the end of June to file your FBARs, FATCA reports and Statements of Special Foreign Financial Assets, as appropriate, however, which brings us back to those controversial foreign income reports.

As you know if you, an estate or trust you manage, or your corporation has over $10,000 in foreign banks, the Bank Secrecy Act requires you to file a FBAR (Report of Foreign Bank and Financial Accounts) in order to subject them to American taxation. Required filers are those who had signature authority over those foreign accounts at any period in the year.

Similarly, you have to comply with the Foreign Account Tax Compliance Act by reporting certain accounts and income you hold abroad. Individuals must attach a Form 8938 (Statement of Special Foreign Financial Asset) to their tax return. To prevent noncompliance by organizations and entities, the U.S. government has made arrangements for American financial institutions and U.S. tax withholding agents abroad to withhold 30 percent of any payments made by U.S. sources to foreign entities that can't present FATCA documentation.

If you haven't filed a FBAR or FATCA documentation, penalties are more costly if it was willful

Whether you willfully refused to file or simply didn't understand the requirements, however, there are two important things you need to know right away:

  • The IRS recently issued a memorandum requiring documentation if your failure to file was willful. Also, the memorandum clarified that examiners are to extract the maximum penalty for each year of willful noncompliance, whereas the annual penalty for non-willful violators will generally not exceed $10,000.
  • The 2014 Offshore Voluntary Disclosure Program is still in operation, under the same terms as the 2012 program. If you haven't disclosed your foreign financial assets, you can disclose those accounts now, before they are detected by the IRS. The penalties under the OVDP are quite high, but much lower than what you might face if the IRS discovers the accounts on its own -- plus you'll avoid criminal prosecution.  

You won't shock a tax attorney by revealing your non-compliance, willful or not. We are happy to discuss FBARs, FACTA, the OVDP or any other issue involving international taxation in a completely confidential meeting.

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