This predicament is not an uncommon occurrence. Many taxpayers may have had a foreign bank or brokerage account and reported the income in their tax returns or earned no income but did not know they had to file an FBAR. They are often panic-stricken over what they have heard are horrific consequences. But, there is now light at the end of the tunnel thanks to a new IRS procedure aimed at these taxpayers.
Should these taxpayers with delinquent FBARS enter the OVDP?
Absolutely not. The Offshore Voluntary Disclosure Program or OVDP is for tax criminals or those who fear imposition of a draconian civil FBAR penalty. The OVDP is not for those who’ve reported all income from an offshore account but failed to file an FBAR or other foreign information return.
Should they elect the new Streamlined Compliance Procedures?
No, they should not. The Streamlined Procedures (which are really two processes one for expats and one for U.S. residents) is for those taxpayers who have unreported income and / or unfiled or FBARS, where the non-reporting or failure to file was not willful but due to, “negligence, inadvertence or mistake, or conduct that is the result of a good faith misunderstanding of the requirements of the law.” (Language from Streamlined Process Certification). The Streamlined Process is not for those who’ve reported all income or had no income to report on the account but simply neglected to file an FBAR.
How could the taxpayers have no income on an account?
- Two examples:
- A non-interest bearing account such as a checking account maintained for the convenience of paying expenses when visiting the foreign country on as a tourist or on business.
- A trading account that earns no income or incurs a loss during the year.
Then, what should the taxpayer do?
These taxpayers should follow the Delinquent FBAR Submission Procedures published by IRS on June 18, 2014.
Who may use the Delinquent FBAR Submission Procedures?
A taxpayer who:
- Did not file an FBAR, when required.
- Is not currently being civilly examined by IRS and is not currently the target of an IRS criminal investigation.
- Has not been contacted by IRS about the delinquent FBARS.
- Does not need to file delinquent or amended tax returns to report and pay additional tax.
How do you file delinquent FBARS under the Delinquent FBAR Submission Procedures?
- E-file the delinquent FBARS as provided in the FBAR filing instructions using the BSA E-Filing System. You generally cannot paper file the FinCEN Form 114 which replaced the TD 90-22.1 form which had been filed with the Department of the Treasury in Detroit.
- On the first page of the E-filing input screens there is a drop down menu where the filer must indicate the reason for filing late. The most common reason for those who have reported all income will be, “Did not know I had to file,” but there are other selections including “Other,” for which an explanation must be provided in limited space.
- If for some reason you are unable to file electronically, you may contact FinCEN’s Regulatory Helpline at 1-800-949-2732 or 1-703-905-3975.
Will I be penalized for filing late?
No. The IRS in its announcement of the Delinquent FBAR Submission Procedures states:
“The IRS will not impose a penalty for failure to file delinquent FBARS if you properly reported on your U.S. tax return, and paid all tax on, the income from foreign financial accounts reported on the delinquent FBARS and you have not been previously contacted regarding an income tax examination or a request for delinquent returns for the years for which the delinquent FBARS are submitted?”
Will my income tax returns or FBARS be audited?
The IRS announcement regarding Delinquent FBAR Submission Procedures states:
“FBARs will not be automatically subject to audit but may be selected for audit through the existing audit selection processes that are in place for any tax or information returns.”
While the announcement does not mention income tax returns, presumable the same no-automatic-audit rule will apply. If an audit later reveals that income was not reported on the account, the taxpayer will face potentially severe FBAR and income tax civil and criminal sanctions.
How many years of delinquent FBARS must I file?
File delinquent FBARS for the years open under the Statute of Limitations for assessing FBAR civil penalties. Normally that will be six years because the Statute of Limitations is six years from the due of the delinquent FBAR, (June 30). Unlike the Statute of Limitations on income tax assessments, the FBAR Statute begins to run even if no FBAR was filed. Thus, a 2007 FBAR, due June 30, 2008 would not be required to be filed now because the Statute of Limitations expired on June 30, 2014. Assuming the 2013 FBAR was timely filed, one would file for the years 2008 through 2012.
Can my CPA prepare and e-file the FBAR for me?
In most cases yes, if it is clear that all income earned on the account was reported. Caveat: There is no di minimis rule; even nominal unreported income will disqualify a taxpayer from using the Delinquent FBAR Submission Procedures and relegate him to employing the OVDP or Streamlined Offshore Compliance Procedures.
Unless it is clear that no income went unreported, taxpayers should probably first consult with an experienced OVDP tax attorney about how to proceed. A CPA has no communications privilege as does an attorney and may be told incriminating admissions about which he can for compelled to testify.
© 2014 by Robert S. Steinberg, Esquire – CPA All rights reserved. www.steinbergtaxlaw.com