All tax returns submitted under the IRS streamlined OVDI procedures must have a valid Taxpayer Identification Number (TIN). Tax returns submitted without a valid SSN or ITIN will not be processed under the streamlined procedures. However, for taxpayers who are ineligible for an SSN but do not have an ITIN, a submission may be made under the IRS streamlined ODVI procedures if accompanied by a complete ITIN application.
Offshore Voluntary Disclosure (OVDI)
Streamlined Offshore Voluntary Disclosure Program – Part One
On September 1, 2012, the IRS first offered the streamlined offshore voluntary disclosure program to bring non-resident taxpayers back into compliance. [1] The key factor of the streamlined offshore voluntary disclosure program is that failure to file must not have been willful. As the program proved popular, the IRS has made major changes to the program to make it available to a broader base of taxpayers. First, the taxpayer has to certify that their failure to report foreign financial assets and pay all the tax due did not result from willful conduct on their part. If the failure to file was not willful, the program provides a streamlined process for filing amended or delinquent returns, and terms for resolving the tax penalty obligation. At this point, the program is in place for an indefinite time.
IRS Voluntary Disclosure
Tax professionals, the IRS, and FinCEN have independently and together worked to find ways of bringing taxpayers back into compliance through the IRS Voluntary Disclosure program. Currently there are many ways to come clean with the IRS and FinCEN. Each method will be discussed in detail later. This section will provide an overview. A method previously advised by accountants is doing nothing and hope for the best.[1] With the growing number of countries and foreign financial institutions becoming complainant under FATCA, this no longer is a sensible option. If you hold a non-disclosed offshore account, it will eventually be discovered. Now is the time to act. To decide what option is best for your situation, you should retain legal counsel whose practice concentrates in taxation. Your conversations with your accountant are not protected by attorney/client privilege. You should engage legal counsel to assist you in deciding what the best course of action is.
FBAR Penalties and Criminal Penalties
FBAR Penalties – Failure to file FinCEN form 114 (the FBAR)
Failure to file FinCEN form 114 (the FBAR) can be far more severe if the failure to file is found to be willful. A finding of a willful failure to file carries a penalty of up to the greater of $100,000 or 50% of the account balance. This penalty is in addition to the tax, interest, and an accuracy penalty of between 20% and 40%. The test for willfulness is whether there was a voluntary, intentional violation of a known legal duty. The IRS has the burden of proof, but in a FBAR case, the only thing the prosecution must show is that the person knew they had obligation to report.[1] If there is a finding of willfulness, there is a strong potential criminal prosecution of the case. If the failure to file is found to be non-willful, the penalty is potentially $10,000. Prison time is still possible for the non-willful taxpayer, but unlikely.
Streamlined OVDP – Penalties for Not Participating
The Departments of Justice and Treasury have joined forces to crack down on the failure to report foreign accounts and income. They are utilizing the Internal Revenue Service, FinCEN, and the United States Attorney General’s office in a collaborative effort to target individuals, banks, foreign financial institutions, and countries who don’t comply with FATCA and the U.S. tax laws. As their effort has proved profitable with $6.5 billion dollars of collected revenue, more assets have been allocated to allow Justice and Treasury to expand upon their success. In addition, FATCA and other new laws with enhanced penalties have come into play giving the noncompliant taxpayer, financial institution or country greater incentive to come forward before they become the target of an investigation which very well could lead to criminal prosecution or greater civil penalties. Each delinquent filing or noncompliance is considered separately under the law, and carries its own repercussions. There are several consequences for not participating in streamlined OVDP that taxpayers need to be aware of. Here are the highlights.
FATCA – The Foreign Account Tax Compliance Act
The Foreign Account Tax Compliance Act (FATCA) mandates that required U.S. taxpayers, including those living outside of the United States report their financial accounts held outside of the United States. It also requires foreign financial institutions report information to the IRS about their U.S. clients. The U.S. is also in pursuit of Intergovernmental Agreements with other countries to make sure that the requirements of FATCA are carried out by foreign financial institutions. FATCA was passed on March 18, 2010 as an amendment to an appropriations bill known as the HIRE Act.
Foreign Asset Reporting Requirements
The following is a summary of some of the foreign asset reporting requirements:
FBAR Requirements
FBAR Requirements – FinCEN form 114, Report of Foreign Bank and Financial Accounts (FBAR)
Individuals who are required to file FinCEN form 114 are U.S. persons, which include U.S. citizens, resident aliens, trusts, estates, and domestic entities that have an interest in foreign financial accounts and meet the reporting threshold.[1] This includes residents and resident aliens of U.S. territories and U.S. territory entities. The threshold is a value of $10,000 or more during the calendar year. If you are required to report, you must report the maximum value of the financial account. To make this determination you must determine the maximum value using periodic account statements. Then you must covert this figure to U.S. dollars using the end of the year exchange rates and report the figure in U.S. dollars. As of 2014 the report must be electronically filed through FinCEN’s website by June 30, and no extensions are given. The FBAR does not get filed with the federal income tax return.
Reporting Requirements for Foreign Assets – Part One
Individual Reporting Requirements for Foreign Assets – Your Tax Return
Here is a summary of the Reporting Requirements for Foreign Assets. Under the law, U.S. citizens, resident aliens, and certain nonresident aliens are required to report worldwide income from all sources including foreign bank and financial accounts. Required reporters must pay taxes on income from these accounts at their individual tax rates. The IRS recognizes that there are many legitimate reasons for U.S. taxpayers to have offshore accounts such as convenience, investing, and to facilitate international banking transactions. However, U.S. taxpayers are prohibited under law from using offshore accounts, including foreign banks, security accounts, and trusts, to avoid paying tax. [1] To fully understand the problem, it is necessary to understand what the reporting requirements for foreign assets are.