- 1 Accidental or Willful Failure to Report Foreign Accounts?
- 2 Reporting Foreign Account Requirements
- 3 Common Examples of Accidental Foreign Account & Asset Noncompliance
- 4 Common Examples of Willful Foreign Account or Asset Noncompliance
- 5 IRS Amnesty Program Options
- 6 Accidental vs Willful Noncompliance is Treated Differently
- 7 We Specialize in Streamlined & Offshore Voluntary Disclosure
Accidental or Willful Failure to Report Foreign Accounts?
Accidental or Willful Failure to Report Foreign Accounts: When it comes to reporting foreign bank accounts and other offshore assets to the US government by US Persons — there are many different offshore forms a taxpayer may have to file. It is not uncommon for US Person account holders to fail to report certain accounts or assets — either accidentally or willfully. In fact, the Internal Revenue Service has developed several different foreign account amnesty programs to assist taxpayers with safely getting into compliance. Whether or not a person failed to report their foreign accounts intentionally or accidentally will determine which offshore program the filer qualifies for.
Let’s review some examples of the difference between an accidental failure to report foreign accounts and a willful failure to report foreign accounts:
Reporting Foreign Account Requirements
Each year, individuals who have ownership or signature authority over foreign accounts, assets or investments may have various reporting requirements — depending on the value of the accounts and the category of investments. It is very difficult to be in compliance, even under the best of circumstances — due to the sheer number of different forms and requirements a taxpayer may have.
For some taxpayers, the thought of annual compliance is just too much to deal with — and they knowingly or willfully fail to get into compliance. For other taxpayers — they had no idea they were supposed to report until recently and therefore their noncompliance in prior years was completely accidental. If a person was accidental in their noncompliance, then they generally qualify as non-willful — and have several options available to them to safely get into compliance.
If on the other hand a person was willful, then they still have an opportunity to safely get into offshore compliance — but the number of options available to them are limited, and it generally requires the account holder to submit into the traditional voluntary disclosure program otherwise referred to as VDP.
Common Examples of Accidental Foreign Account & Asset Noncompliance
Here are some common examples of accidental or “non-willful” noncompliance:
- Foreign Account Holder was on a visa (H-1B, L-1, EB-5) and was not made aware of the reporting requirements by their tax professional because the tax professional told them there was nothing they had to do unless they were a citizen or permanent resident.
- Foreign Account Holder has foreign money, but they are not bank accounts per se — and taxpayer wholeheartedly believed that only bank accounts had to be reported.
- Foreign Account Holder only reported accounts that were active or generated income — and was unaware that all accounts, including zero balance and dormant accounts also had to be reported.
Common Examples of Willful Foreign Account or Asset Noncompliance
Here are some common examples of willfulness:
- Foreign Account Holder was aware of the reporting requirements, but chose not to file because they did not want to disclose their foreign accounts.
- Foreign Account Holder initially was unaware of the reporting requirements and then learned about them a few years later but still intentionally took no action for several years.
- Foreign Account Holder’s foreign bank told taxpayer not to worry because that bank does not provide information to the IRS, so they will not get caught.
IRS Amnesty Program Options
There are many offshore amnesty programs available to help account holders get into offshore compliance.
We will briefly summarize these Amnesty Programs —
Voluntary Disclosure Program (VDP or New OVDP)
The Voluntary Disclosure Program of the IRS, aka VDP or “New OVDP” (for offshore matters) is the traditional program that has been available to Taxpayers for many years. The program is generally used by Taxpayers who cannot certify under penalty of perjury that they are non-willful.
The program was recently updated.
Streamlined Offshore Procedure
In 2014, the IRS developed the stand-alone streamlined procedures. These procedures are used to assist Taxpayers residing in the U.S. or abroad, with offshore amnesty. The Streamlined procedures require Taxpayers to certify under penalty of perjury that they are non-willful.
In exchange, Taxpayers pay significantly less penalties – and may even qualify for a penalty waiver.
Streamlined Domestic Program (SDOP)
The Streamlined Domestic Program is reserved for non-willful U.S. residents who filed original tax returns timely. The program reduces the offshore penalties from upwards of 50% annually (to a 100% maximum) all the way down to 5%.
And, certain assets are excluded from the penalty computation, such as RRSP.
Streamlined Foreign Program (SFOP)
The Streamlined Foreign Program is reserved for non-willful foreign residents. Filers do NOT have to had filed timely original tax returns. Moreover, ALL tax and asset/account penalties are completely waived.
Delinquent International Information Return Program
The Delinquent International Information Return Program is an alternative to making Streamlined Disclosure. The process is less formalized (for better or for worse), and penalties are waived.
This procedure is primarily used by non-willful U.S residents who have no unreported income. It was revised in 11/2020.
Delinquent FBAR Program
When the only issue involves the non-filing of the FBAR, the FBAR Delinquency Procedures may be available.
Like DIIRSP, these procedures are a less formalized alternative to the Streamlined Procedures. This procedure is also used by non-willful U.S residents who have no unreported income, and penalties are waived.
Reasonable Cause is an alternative to Streamlined Procedures.
It is primarily used by U.S. residents (or foreign residents who do not qualify for Streamlined) who are seeking to avoid the SDOP 5% penalty – but do not squarely meet the requirements for Delinquency Procedures.
Accidental vs Willful Noncompliance is Treated Differently
In conclusion, when a US Person has an accidentally failed to comply with IRS offshore reporting of foreign accounts, assets or investments — they generally have several options available to them in order to say if we get into compliance. If a person is willful (which may include reckless disregard or willful blindness) they have less options available to them, and it generally requires the taxpayer to submit to the traditional voluntary disclosure program (VDP) in order to legally get into compliance.
We Specialize in Streamlined & Offshore Voluntary Disclosure
Golding & Golding specializes exclusively in international tax, and specifically IRS offshore disclosure and FBAR Amnesty Programs.
Contact our firm today for assistance.