Montgomery McCracken Assists Client in FBAR Voluntary Disclosure Filing

February 9, 2016

Gary M. Edelson, chair of Montgomery McCracken’s Tax Practice, recently represented a client in the guidance of the IRS’s FBAR compliance filing. The client who immigrated to the United States owned cash and real estate outside the United States and failed to file the Report of Foreign Bank and Financial Accounts (FBAR).

Edelson’s representation saved the client from having to pay the IRS six figures in penalty taxes. Under his guidance, the client’s penalty rate tax was reduced from 27.5% to 5%.

Foreign accounts must be reported when a taxpayer has a financial interest in or signature authority or other authority over foreign financial accounts if the aggregate values of those accounts exceed $10,000 at any time during the calendar year reported.

The IRS has strictly enforced the guidelines and consequences for those failing to file an FBAR when required. According to the Internal Revenue Manual, the maximum willful FBAR penalty is the greater of $100,000 or 50% of the account’s closing balance on the last day for filing the FBAR, and the maximum non-willful FBAR penalty is $10,000.

The Foreign Account Tax Compliance Act (“FATCA”) was enacted in 2010. FATCA was passed to make it very difficult for U.S. taxpayers to evade tax through the use of offshore accounts. As a result of FATCA, foreign banks must report accounts owned by U.S. citizens to either their own government who reports to the I.R.S. or directly to the I.R.S.

Two separate offshore disclosure programs are in effect. There is the offshore voluntary disclosure initiative and the streamlined offshore disclosure procedure. Under the offshore disclosure program, a taxpayer submits 8 years of FBARs and 8 years of amended returns and must pay any tax due and owing on those 8 years of amended returns plus interest, and a 20% accuracy related penalty. The taxpayer also must pay a one-time penalty of 27.5% of the highest yearly aggregate balance of foreign assets.

The streamlined offshore disclosure program offers a less costly method for compliance. The taxpayer must submit 6 years of FBARs, 3 years of amended returns, and pay a one-time penalty of 5% of the highest yearly aggregate balance of foreign assets. However, a taxpayer can participate in the streamlined program only if his failure to file foreign information returns, report foreign income on his tax returns, and pay tax on the income due was due to “non-willful conduct”. For the streamlined program, the term “non-willful conduct” includes inadvertence, negligence or mistake, or conduct that is the result of a good faith misunderstanding of the requirements of the law.  When a taxpayer enters the streamlined program and fails to meet the non-willful requirement, the taxpayer’s submission is rejected and an audit can result. A taxpayer who is comfortable that his failure was the result of “non-willful conduct” should consider using the streamlined offshore disclosure procedure.

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