Should I Close my Unreported Foreign Accounts (No, Here’s Why)

Should I Just close my Unreported Foreign Accounts?

In recent years, the Internal Revenue Service and US government as a whole have made enforcement of foreign account, asset, investment, and income reporting a key compliance priority. In a now all too familiar scenario, a US Person (Citizen or Resident) will come to learn that they did not report their foreign assets or income to the IRS in prior years. Unfortunately, due to all the unnecessary and inaccurate fear-mongering that taxpayers will undoubtedly find during their online research quest about FBAR and FATCA, they come to the conclusion that they may be in serious trouble – when in fact, oftentimes these matters can be resolved relatively straightforward and without any fear of criminal or willful civil panties. One immediate knee-jerk reaction that many taxpayers have is just simply to close the foreign accounts or transfer them to another non-US person and hope the matter goes away without reporting them through one of the offshore amnesty programs. This is not a good strategy and here are three reasons why:

FATCA Banks/Brokerages May Have Already Reported You

FATCA is the Foreign Account Tax Compliance Act. More than 110 countries have entered into FATCA agreements (IGAs) with the United States — with hundreds of thousands of foreign financial institutions actively reporting Taxpayers to the US government. These Foreign Financial Institutions report US account holder information regarding foreign account balances and income generated from the accounts. In addition, some of these institutions also identify whether they have updated the customer about self-certifying compliance. Therefore, the IRS may already have your information and you are not aware of it – at that point, just going off and closing the accounts and not reporting it can lead to (avoidable) problems down the line.

Reverse Eggshell Audit

If the Internal Revenue Service already has your information about the undisclosed foreign accounts and assets, that does not mean they are going to tell you about it. If you are selected for audit and the IRS starts asking questions about foreign accounts, you may be under the false presumption that the IRS does not know about it because they have not yet identified it as part of the audit. Oftentimes, the IRS will use the reverse eggshell audit strategy in which the IRS knows about the information but you do not know they know about the information – and your responses may lead to self-incrimination.

You Turned a Non-Willful Violation into a Willful Violation

If you have some unreported foreign accounts, assets, or income and did not report it but were unaware of the reporting requirements, this is usually a relatively straightforward fix. Taxpayers can opt to use one of the non-willful submission options such as the Streamline Procedures, Delinquency Procedures, or Reasonable Cause to resolve the problem. But if you make false statements to the IRS and you are caught, you no longer qualify for a non-willful explanation/submission and instead may become subject to much higher willfulness penalties and even a criminal investigation if they believe you were fraudulent. Especially for non-willful taxpayers who reside overseas may qualify for a complete penalty waiver under The Streamline Foreign Offshore Procedures (SFOP).

Current Year vs Prior Year Non-Compliance

Once a taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, taxpayers should consider speaking with a Board-Certified Tax Law Specialist that specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties. 

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure. 

Contact our firm today for assistance.