Is the streamlined process for foreign accounts a good bet?

If you are a United States taxpayer with interest in a foreign asset, odds are high you know that you must report this interest to the government. A failure to do so can result in serious penalties, ranging from steep monetary fines to potential imprisonment. The severity of the penalties often hinges on one thing: whether or not the failure to report was willful.

If the failure is deemed no willful, the penalties are generally less severe. Some taxpayers that mistakenly failed to disclose these assets can qualify for streamlined procedures. However, as noted by a recent publication in the CPA Journal, attempts to file using this system when the failure to disclose was willful can have serious consequences.

What are the streamlined procedures? These procedures basically allow taxpayers to file three years of amended tax returns and six years of Foreign Bank and Financial Accounts (FBARs) with reduced penalties compared to other options or discovery by the IRS. The taxpayer that uses this process will generally have either have no miscellaneous penalty or a 5 percent penalty. This seems like a great deal, especially when compared to the fee of up to 50 percent of the foreign account applied under the offshore voluntary disclosure program.

One of the keys to qualification in this program is a certification that the filing was "due to non-willful conduct." Examples that would qualify include "negligence, inadvertence, or mistake or conduct that is the result of a good faith misunderstanding of the requirements of the law."

The Internal Revenue Service will review the filing, which often includes a narrative explaining the failure to report the accounts. The Department of Justice warns taxpayers that a failure to include facts because the facts may be viewed as supporting a willful failure to file is a dangerous gamble. Ultimately, the agency states that they will uncover these facts. When found, this could lead to prosecution against those who "willfully submit false statements in an effort to obstruct and impede the IRS and evade the payment of tax due."

What should I do if I need to report foreign accounts? Those who are attempting to come into compliance should weigh their options carefully. It is wise to seek legal counsel to help guide you through the process. Your attorney can review your situation and discuss the pros and cons of each option, better ensuring that you mitigate any potential penalties when coming into compliance. 

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