Unreported Offshore Accounts & Penalties
Unreported Offshore Accounts: When a US person has unreported offshore bank accounts and other accounts which have not been timely disclosed to the U.S. government, they may be in jeopardy of being discovered, audited, and penalized by the IRS. But it is important to keep in mind that just because a person has missed the timely reporting of offshore accounts to the Internal Revenue Service does not mean they will be penalized. The IRS has developed several amnesty programs that a Taxpayer can use to avoid, minimize, or abate offshore penalties.
The key ingredient to qualifying for IRS amnesty is whether or not the person is willful or non-willful. Even if they are willful, then can still qualify for the Voluntary Disclosure Program (VDP) to ward off a potential criminal investigation.
The most important thing to remember with unreported offshore accounts is that a person is only eligible until they are contacted by the IRS for audit or examination.
In other words, if a foreign account holder gets audited by the IRS (for any reason) and/or learns they are under criminal investigation before they have an opportunity to enter into one of the offshore amnesty programs — they are no longer eligible to apply to the program(s).
Which Offshore Accounts does IRS Require to be Reported?
There are many different international information reporting forms that the Taxpayer may be required to file when they have offshore bank accounts. Two of the most common offshore bank account compliance forms are the FBAR (Foreign Bank and Financial Account Form aka FinCEN Form 114) and FATCA Form 8938 (Foreign Account Tax Compliance Act).
When a taxpayer has offshore accounts, these are the two most common forms they may have to file each year. The forms are similar but have different reporting and threshold requirements. Before filing either form, it is important that the Taxpayer understands the difference between FBAR vs 8938.
If there are investment accounts, there may be additional reporting requirements and the Taxpayer may also have to file a Form 8621 (PFIC).
What Happens to an Unreported Offshore Account?
Here is where it is crucial that the Taxpayer keeps their wits about them before making a decision about how to proceed. The Internet is filled with unnecessary fear-mongering about how Taxpayers will automatically go to prison and get hit with $500,000 fines if they are caught (this is not true).
On the other end of the spectrum, there are tax preparers and expat forums that make it seem that the Taxpayer can just file a quiet disclosure and avoid getting into proper tax amnesty. This is also inaccurate and may result in criminal investigation of the Taxpayer for willful violations.
Instead, the Taxpayer should consider one of the offshore account amnesty programs.
List of the Most Common Offshore Account Penalties
The civil FBAR penalties can range extensively depending on whether they are non-willful or willful. There are also potential criminal FBAR penalties, but those are rare.
Form 8938 FATCA Penalties
The are two types of Form 8938 penalties.
As provided by the IRS:
Failure-To-File Form 8938 Penalty
“If you are required to file Form 8938 but do not file a complete and correct Form 8938 by the due date (including extensions), you may be subject to a penalty of $10,000.”
Continuing Failure-to-File Form 8938
“If you do not file a correct and complete Form 8938 within 90 days after the IRS mails you a notice of the failure to file, you may be subject to an additional penalty of $10,000 for each 30-day period (or part of a period) during which you continue to fail to file Form 8938 after the 90-day period has expired.
The maximum additional penalty for a continuing failure to file Form 8938 is $50,000.”
Form 3520 Penalties
As provided by the IRS:
“A penalty applies if Form 3520 is not timely filed or if the information is incomplete or incorrect (see below for an exception if there is reasonable cause).
Generally, the initial penalty is equal to the greater of $10,000 or the following (as applicable): 35% of the gross value of any property transferred to a foreign trust for failure by a U.S. transferor to report the creation of or transfer to a foreign trust. 35% of the gross value of the distributions received from a foreign trust for failure by a U.S. person to report receipt of the distribution.
5% of the gross value of the portion of the foreign trust’s assets treated as owned by a U.S. person under the grantor trust rules (sections 671 through 679) for failure by the U.S. person to report the U.S. owner information.
Such U.S. person is subject to an additional separate 5% penalty (or $10,000 if greater), if the foreign trust (a) fails to file a timely Form 3520-A, or (b) does not furnish all of the information required by section 6048(b) or includes incorrect information. See section 6677(a) through (c) and the Instructions for Form 3520-A.
Additional penalties will be imposed if the noncompliance continues for more than 90 days after the IRS mails a notice of failure to comply with the required reporting. For more information, see section 6677.”
Form 3520-A Penalties
As provided by the IRS:
“The U.S. owner is subject to an initial penalty equal to the greater of $10,000 or 5% of the gross value of the portion of the trust’s assets treated as owned by the U.S. person at the close of that tax year, if the foreign trust
(a) fails to file a timely Form 3520-A, or
(b) does not furnish all of the information required by section 6048(b) or includes incorrect information.”
“The U.S. owner is subject to an additional separate penalty equal to the greater of $10,000 or 5% of the gross value of the portion of the trust’s assets treated as owned by the U.S. person at the close of that tax year, if the U.S. owner
(a) fails to file a timely Form 3520 (Part II), or
(b) fails to furnish all of the information required by section 6048(b) or includes incorrect information.
See section 6677(a) through (c).
Additional penalties will be imposed if the noncompliance continues for more than 90 days after the IRS mails a notice of failure to comply with the required reporting.”
“Criminal penalties may be imposed under sections 7203, 7206, and 7207 for failure to file on time and for filing a false or fraudulent return. Penalties may also be imposed under section 6662 (j) for undisclosed foreign financial asset understatements.”
Form 5471 Penalties
As provided by the IRS:
“A $10,000 penalty is imposed for each annual accounting period of each foreign corporation for failure to furnish the required information within the time prescribed.
If the information is not filed within 90 days after the IRS has mailed a notice of the failure to the U.S. person, an additional $10,000 penalty (per foreign corporation) is charged for each 30-day period, or fraction thereof, during which the failure continues after the 90-day period has expired.
The additional penalty is limited to a maximum of $50,000 for each failure. Any person who fails to file or report all of the information required within the time prescribed will be subject to a reduction of 10% of the foreign taxes available for credit under sections 901, 902, and 960.
If the failure continues 90 days or more after the date the IRS mails notice of the failure to the U.S. person, an additional 5% reduction is made for each 3-month period, or fraction thereof, during which the failure continues after the 90-day period has expired. See section 6038(c) (2) for limits on the amount of this penalty.”
Failure to File Information under Section 6046
“Any person who fails to file or report all of the information requested by section 6046 is subject to a $10,000 penalty for each such failure for each reportable transaction.
If the failure continues for more than 90 days after the date the IRS mails notice of the failure, an additional $10,000 penalty will apply for each 30-day period or fraction thereof during which the failure continues after the 90-day period has expired. The additional penalty is limited to a maximum of $50,000.”
“Criminal penalties under sections 7203, 7206, and 7207 may apply for failure to file the information required by sections 6038 and 6046. Note. Any person required to file Form 5471 and Schedule J, M, or O who agrees to have another person file the form and schedules for him or her may be subject to the above penalties if the other person does not file a correct and proper form and schedule.”
When a Taxpayer can show reasonable cause, the IRS will waive the offshore account penalties. Reasonable cause has several components to it, and is based on a totality of the circumstance approach.
Foreign Account Amnesty for Unreported Offshore Accounts
When a Taxpayer has missed the deadline for reporting an offshore account in the current or prior years, they should proceed with caution. There are various offshore amnesty programs available to Taxpayers who qualify. And, the penalties will vary as well.
Some programs carry a heavier penalty than others, while other programs allow for a complete penalty waiver.
It is important that the Taxpayer consult with a Board-Certified Tax Specialist to assess their options properly.
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