This week’s post from our CPA guest blog series comes to us again from Alison N. Dougherty, a Senior Manager in tax at Aronson LLC who assists U.S. taxpayers with U.S. tax reporting and compliance for offshore assets and foreign accounts. http://www.aronsoncompany.com/
What do I do if I had unreported offshore assets or foreign accounts for prior years? What is the risk of not filing U.S. foreign reporting forms for prior years? These are questions that U.S. international tax reporting and compliance specialists hear very often these days. Surprisingly, the average tax return preparer may not have specialized capability to address the issues that arise when a U.S. taxpayer has offshore assets or foreign accounts. It can be a very expensive and time-consuming process for U.S. taxpayers to resolve prior year delinquencies, which can result in substantial penalty exposure including criminal prosecution. So what options are available to a U.S. taxpayer who discovers that offshore assets or foreign accounts should have been reported but were not?
The options available depend on two critical factors. First is whether all of the taxable income from the offshore assets or foreign accounts was properly reported on the U.S. taxpayer’s U.S. Federal tax return. Second is whether the failure to report the offshore assets and foreign accounts including the related taxable income was due to non-willful conduct or conduct that was intentional or willful.
If all of the taxable income was reported and the failure to file the U.S. foreign reporting forms was due to non-willful conduct, it is possible to file the delinquent forms for the prior years and attach a reasonable cause statement. In this case, the IRS will not impose the civil penalties for late filing the FinCEN Form 114 (f/k/a Form TD F 90-22.1) Foreign Bank Account Report (FBAR) and Forms 8938, 5471, etc. This procedure actually replaces IRS OVDP FAQs # 17 and 18, which are no longer in effect.
If some or all of the taxable income was not reported and the failure to file was due to non-willful conduct, there are two main options. First, the IRS has new Streamlined Offshore filing compliance procedures that allow taxpayers to file three years of amended U.S. Federal tax returns and six years of Foreign Bank Account Reports. The cost of the filing is a 5% Streamlined Offshore penalty plus additional tax and interest on the tax due with the amended tax returns. There is some risk of audit with a Streamlined Offshore filing, but the IRS will not impose the civil failure to file penalties, which is $10,000 USD per form per year unless there is evidence of fraud on the original Federal tax returns. Second, there is the quiet disclosure option to which the IRS is opposed and which invites audit risk for all open years including the risk of all applicable penalties being imposed. If the U.S. foreign reporting forms were required but were not filed, the statute of limitations will still be open on the prior year Federal tax return.
If the failure to file the U.S. foreign reporting forms was due to intentional or willful conduct, then the main option is the IRS Offshore Voluntary Disclosure Program (OVDP). In 2014, the IRS extended the amnesty available under the protection of the OVDP. The cost of the filing is a 27.5% Offshore penalty which in some circumstances could be higher if the U.S. taxpayer has foreign accounts with a foreign financial institution identified on a specific list by the U.S. Government. The main incentive offered with the OVDP is protection from criminal prosecution and possible imprisonment as a penalty for intentional or willful delinquencies.
Alison N. Dougherty
805 King Farm Blvd, Suite 300
Rockville, MD 20850
Direct Line (301) 231-6290
Main Line (301) 231-6200
Fax (301) 231-7630
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