FBAR Voluntary Disclosure: International Tax Lawyer Guide

FBAR Voluntary Disclosure: International Tax Lawyer Guide

FBAR Voluntary Disclosure (In General)

FBAR Voluntary Disclosure: When a US person has not filed previous year FBAR (Foreign Bank and Financial Account Reporting aka FinCEN Form 114), they may be subject to fines and penalties. Despite what some  fear mongering attorneys would like you to believe, most taxpayers can avoid or minimize the risk of non-reporting penalties by safely getting into compliance through one of the offshore amnesty programs. Recently, the Internal Revenue Service ended a very popular delinquency procedure program referred to as DIIRSP — Delinquent International Information Return Submission Procedures.  

But, as of the time of this article, the IRS has not closed the Delinquent FBAR Submission Procedures (DFSP).

Unfortunately, in a brazen attempt to scare taxpayers, some attorneys are using the closure of DIIRSP to needlessly scare taxpayers. They claim to specialize in FBAR matters and refer the taxpayers directly to the criminal penalty statute — which is rarely enforced in straight FBAR cases — unless there are other offshore violations as well.

Let’s review the basics of FBAR Voluntary Disclosure and Compliance.

FBAR Voluntary Disclosure Scaremongers are on the Prowl

Some attorneys want nothing more than to scare you out of your money. They do this by flashing on their website about how if you did not file the FBAR, there is a good chance you will go to prison for upwards of 10-years and be stuck with a $500,000 fine, simply because you forgot to include that account your grandma left you before she passed away, or never reported the account you share with your elderly mother back in Peru.

The IRS only pursues a few 1000 criminal cases each year that end up being prosecuted. These prosecutions are not just for offshore tax crimes but for all tax crimes.

So when you consider the number of people with foreign accounts, and the number of foreign accounts that are missing from FBARs annually — the number of those people who end up being criminally prosecuted is negligible.

That is not to say you shouldn’t get into compliance, because the civil FBAR penalties can be rough — but try not to be overwhelmed by FBAR scaremongers.

Delinquent FBAR (DFSP)

If the only issue you have with your non-disclosure is the FBAR, then you may still qualify for delinquency procedures. This is not DIIRSP, but rather DFSP. It is important to note that there are very specific requirements for qualifying for DFSP. As provided by the IRS:

  • “The IRS will not impose a penalty for the failure to file the delinquent FBARs if you properly reported on your U.S. tax returns, and paid all tax on, the income from the foreign financial accounts reported on the delinquent FBARs, and you have not previously been contacted regarding an income tax examination or a request for delinquent returns for the years for which the delinquent FBARs are submitted. FBARs will not be automatically subject to audit but may be selected for audit through the existing audit selection processes that are in place for any tax or information returns.

What does this Mean?

What it means, is that you cannot have any unreported foreign income from the unreported accounts that should have been included on your tax return. Therefore, if you are missing $20 from one of the accounts on your tax return, presumably you would not qualify for delinquent FBAR procedures — and instead would have to make a reasonable cause or streamlined submission (presuming you are non-willful).

In addition, since the IRS has done away with DIIRSP, if you have any additional international information reporting forms that should have been filed in addition to FBAR — then you may not qualify for DFSP.

SFCP 

SFCP refers to Streamlined Filing Compliance Procedures. The IRS Streamlined Procedures are used for non-willful taxpayers who qualify for either the domestic or foreign version of the program.

At our firm, we have successful handled more than 1000 streamlined submissions since the program’s inception back in 2014.

There are many nuances when it comes to making a submission under SFCP. For more information you can go direct to our streamlined filing page, where we have links to several other articles we have authored as well on all things Streamlined.

FBAR Voluntary Disclosure (VDP)

FBAR voluntary disclosure is more of a general catchall phrase that is used to describe getting into compliance for prior year nonreporting of the FBAR. But, it can also refer to the specific VDP or “voluntary disclosure program.” VDP is the traditional voluntary disclosure program.

Prior to 9/2018, there used to be a separate offshoot of VDP which was OVDP (Offshore), but that program was terminated in 2018. At the same time, VDP was expanded to include both domestic and offshore compliance .

Unlike the prior version of OVDP (post-2014) in which a person would submit even if they were non-willful — in order to avoid an audit — under the new version of voluntary disclosure, it is typically for clients who cannot qualify as non-willful.

Making a submission to the voluntary disclosure program for FBAR is a very detailed and comprehensive undertaking. We have represented numerous clients since the program’s expansion in November 2018, and it is important for taxpayers to understand the parameters of the program and what the pros and cons are for submission before making a submission.

Reasonable Cause

Reasonable cause is written into many IRS statutes. It provides that the IRS Will not issue penalties if the Taxpayer can show reasonable cause.  Some practitioners mistakenly believe that Taxpayers can only apply for reasonable cause after the penalties have been issued, but that is absolutely incorrect — and dangerous advice to be giving the general public.

As any experienced tax attorney will tell you, it is much easier to avoid a penalty from the IRS then it is to have a penalty issued — and then work to get that penalty removed or abated.

If you have not been penalized and you are non-willful but do not qualify for either delinquent FBAR or streamlined and want to still try to avoid a penalty, you may consider working with a Board-Certified Tax Specialist to make a reasonable cause submission.

In conclusion, FBAR penalties can be tough. There is a broad spectrum of penalties the IRS can issue depending on the facts and circumstances of the underlying situation — but oftentimes the penalties may be reduced, avoided, or abated.

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