International Tax Attorney Serving Jersey City and all of New Jersey
In recent years, the IRS has been pushing a compliance initiative for reporting foreign assets. There are three basic areas of compliance you should know about.
1. The Schedule B
When you file your Form 1040, you must accurately answer the questions found on Schedule B, which ask about interests in or signatory authority over foreign accounts.
This is an area that taxpayers frequently miss, especially when completing their own return. Notice the questions have nothing to do with whether you earned income from the asset. They only inquire about your interest in a foreign asset.
2. FACTA and the Form 8938
FACTA is the Foreign Account Tax Compliance Act. FACTA requires foreign financial institutions to give the US government information about U.S. account holders.
FACTA also requires taxpayers who hold certain foreign financial assets to complete a Form 8938. Here’s what you should know about FACTA and the Form 8938:
FACTA and the Form 8938: What You Need to Know
You Must File If:
- You are required to file a tax return, and
- If you’re single, your foreign assets are worth $50,000 on the last day of the tax year or more than $75,000 at any time during the tax year, or
- If you’re married and filing jointly, your foreign assets are worth more than $100,000 on the last day of the tax year or more than $150,000 at any time during the tax year.
- Not all foreign assets will require a Form 8938. Some asset types are not subject to the reporting requirements.
Form 8938 Deadline:
- Due as part of your Form 1040.
Form 8938 Civil Penalties:
- $10,000, and a continuation penalty up to $50,000, plus
- If you didn’t pay tax on the income from the foreign asset, a 40% penalty.
Form 8938 Statute of Limitations:
- The statute of limitations for civil penalties is 6 years.
3. FBARS: FinCEN 114
A third requirement is the FinCEN 114, Report of Foreign Bank and Financial Accounts (“FBAR”). Unlike the Form 8938, the FBAR does not get filed as part of the income tax return. Rather, there is a special online portal where FBARs are filed.
FBAR: What You Need to Know
FBAR Required If:
- You have financial or signatory interest in a foreign financial
- At any point during the year, the total balance from all accounts exceeded $10,000.
- April 15, or
- October 15 with an automatic extension.
FBAR Criminal Penalties:
- 5 years or $250,000 fine or both.
- Sometimes, it’s increased to 10 years or $500,000 or both.
FBAR Civil Penalties:
- If not willful, $10,000 per account violation.
- If willful, up to the greater of $100,000 or 50% of the balance in the account at the time of the violation.
FBAR Statute of Limitations:
- The statute of limitations for civil FBAR penalties is 6 years.
Confusingly, you may need to file all or only some forms depending on the interest you have in a foreign asset, the asset itself, and the value of the asset. And frustratingly, there are many other forms you may need to file to comply with the foreign asset reporting requirements.
If you have a good tax preparer, he or she should have filled out all the forms. But the tax preparer will only know what forms to fill out if you make a full disclosure of foreign assets. Many taxpayers believe wrongly that foreign assets are exempt from U.S. taxation. Or they may believe since they didn’t make any money off the asset, there’s no reporting requirement. This, too, would be incorrect.
If you prepare your own tax returns, it’s possible you did not even realize what forms needed to be completed. There are even situations where you do not even realize you have a filing requirement because a relative has added your name to a foreign account, unbeknownst to you.
If you have not been filing all the forms needed, you are exposed to draconian penalties that can sometimes exceed the value of the asset today. There are various disclosure programs you can enter to comply with the federal reporting requirements. Each program has its benefits and drawbacks. This needs to be communicated to you clearly so you can make an informed decision on how to proceed.
If you have issues relating to international assets, there are basically 4 programs or procedures to resolve the issue:
International Disclosure Options
- Offshore Voluntary Disclosure Program
- Delinquent FBAR Submission Procedure
- Delinquent International Information Return Submission Procedure
- Streamlined Filing Compliance Procedure
The most important decision we will make is which program to enter.
Offshore Voluntary Disclosure Program
The Offshore Voluntary Disclosure Program (“OVDP”) is a program to bring taxpayers with undisclosed foreign income and assets into compliance.
The program essentially has three requirements:
First, you must amend or file original tax returns for the past eight years. You must pay the tax, interest, and a 20% accuracy related penalty for any tax that was underpaid. If you’re filing delinquent returns, you must also pay the failure to file and failure to pay penalties.
Second, you must file or correct FBARs for the past 8 years. Instead of paying the potential penalties above, you pay a 27.5% penalty. The penalty rate is multiplied by the highest value in noncompliant accounts over the past 8 years. Sometimes, the penalty can be 50%. This occurs if the IRS or Department of Justice has taken public action against a particular bank you have an account with. Here is a current list of banks.
Third, you must file all other informational returns required. By entering into the program, no penalties will be asserted for filing these returns late.
I’m Under Audit and Have Undisclosed Foreign Assets. How Do I Enter OVDP?
Unfortunately, you don’t. If you’re under IRS audit, you are not eligible for the OVDP program. Moreover, if the IRS has contacted you about an undisclosed foreign account, you are also not eligible for OVDP.
There are two major benefits to entering the program. First, the penalties you pay through OVDP will be less than if you were caught. Second, the IRS will not take criminal action against you. Most importantly, you only get these benefits if you fully cooperate and make a full disclosure through the OVDP program. If you lie or don’t make a full disclosure, you’re subject to higher civil and criminal penalties.
What If I Can’t Pay the Penalty?
Between the tax, delinquency penalties, and miscellaneous offshore penalty, the balance due at the end of an OVDP can be daunting. Fortunately, the IRS does allow payment plans if you cannot pay the balance due in full.
Streamlined Filing Compliance Procedures
There are two types of streamlined filing procedures: (1) for nonresident taxpayers and (2) for resident taxpayers. For nonresident taxpayers, you must file 3 years of delinquent or amended returns and 6 years of delinquent or amended FBARs. For nonresident taxpayers, you pay a 0% penalty by coming forward.
For U.S. residents, you file 3 years of amended tax returns and 6 years of FBARs. You are not eligible for the streamlined procedures for U.S. residents if you have not filed your original tax returns. The penalty for this procedure is 5% of the value of the noncompliant assets. The value of the assets is determined by the year-end value. This differs from the OVDP program which values assets at the highest value during a year.
Regardless of whether you are a resident or nonresident, you must submit a certification of willfulness.
Delinquent FBAR Submission Procedure
If you paid all tax due but did not file FBARs, you’re eligible for the delinquent FBAR submission procedure. The program requires you to file the delinquent FBARs and to include a statement explaining why they are being filed late. But to be eligible, you must have already paid all tax due stemming from the foreign assets. Moreover, you are not eligible for this procedure if you’re under audit or if the IRS has contacted you about your foreign accounts.
Delinquent International Information Return Submission Procedure
If don’t need to amend returns to pay the additional tax due, you could be eligible for the delinquent international information return submission procedure. This procedure requires you to file all delinquent information returns and to include a reasonable cause statement. The benefit of this program is you pay no penalty.
Which Program Should I Enter?
We can narrow the options by determining whether there is unreported income. If there’s unreported income, your only options are OVDP and the Streamlined Filing Compliance Procedure. If you’ve reported all your income, all 4 options are still available. OVDP is appropriate for taxpayers who willfully underpaid tax or willfully concealed foreign assets. “Willful” generally means “a voluntary, intentional violation of a known legal duty.” If you knew of the foreign reporting requirements but chose not to comply, you are willful.
For the streamlined compliance procedures, you’ll be certifying you understand that “non-willful conduct is conduct that is due to negligence, inadvertence, or mistake or conduct that is the result of a good faith misunderstanding of the requirements of the law.”
Most taxpayers believe they are not willful. I’ve had only a handful of taxpayers who admitted they knew of the reporting requirements and still did not comply.
But what about willful blindness? For instance, perhaps your tax preparer had you complete a tax organizer with questions regarding foreign assets. You didn’t disclose the assets on the organizer. Is this enough to rise to the level of willfulness? The question of willfulness is not black and white. This is why it’s important to speak to a tax attorney about which program is appropriate for you. Just because you do not believe you were willful doesn’t mean you do not meet the technical definition of willfulness.
Foreign Asset Disclosure: Take Home Points
- If you have foreign assets and have not appropriately reported them to the IRS, you could face severe criminal and civil penalties.
- There are different options to get compliant depending on whether you were willful and underreported income.
- It’s better to come forward than to sit and wait—your foreign financial institution will likely hand over your information to the U.S. government.
Contact a Jersey City Tax Lawyer to Discuss Disclosing Your International Assets
For help with disclosing international assets, contact Paladini Law today.