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1. Non Filed FBARs (What’s an FBAR?)(When is an FBAR generally required?)
2. Non reported foreign income related to the non disclosed foreign accounts or income generating assets or Investments in foreign markets (PFIC regulations)
Foreign Businesses
5471 (CFC) 5472 25% foreign owned U.S. Corp or foreign Corp engaged in U.S. trade or business 926 U.S. Transferor of property to a foreign Corp 8865 U.S. persons with interest in a foreign partnership
Foreign real estate (rental / trading)
Foreign Retirement Plans / Foreign programs similar to social security
Non disclosed foreign Inheritances
3. Box not checked on schedule B indicating you had a foreign account and what country it was in
4. Non filed form 8938 (Statement of Specified Foreign Financial Assets)
Potential Civil and Criminal Penalties:
Current political reality: noncompliance surrounding foreign income number one compliance problem so congress drafted some of the most draconian penalties ever written in the income tax arena to date.
Criminal exposure for income tax evasion charges and willful nonfiling of FBARS
7201 Tax Evasion Filing a false return 7206(1) Failure to file a return 7203 Willful failure to file an FBAR in violation of 31 U.S.C. 5322 Conspiracy to defraud 18 U.S.C. 286 & 371
Up to three to 10 years in prison, $100,00 $250,000 or $500,000 fine
Greater of $100,000 or 50% FBAR Penalty (non willful $10,000 per year)
Penalties for foreign information returns (varies but $10,000 per violation common)
Civil Fraud Penalty
3520 civil penalties up to 35% of gross reportable gift amount – up to 25% for certain gifts
1. Do nothing
2. Get into compliance on a go forward basis
3. Make a quiet disclosure (or take no further action where a quiet disclosure was already made)
4. Make a loud disclosure (2014 OVDP) Badges of fraud? (opt out?)
5. Make a Streamlined Voluntary Disclosure (Self or Professional Prepared returns – last 3 years?)
6. File delinquent information returns where no foreign income tax non compliance with a penalty abatement letter
Gamble that the IRS does not have the resources to detect the taxpayer’s foreign account / asset and associated unreported income. This is a grave mistake.
Every participant in the 2009, 2011, 2012 and 2014 offshore voluntary disclosure required to provide the government with “intel” on the foreign bank(s) they had deposits with. – identify advisors, and others who promoted tax evasion.
FACTA information exchange now open, data mining I
Fuse is lit – especially where bank is under criminal investigation or made a deal with the government for its own tax fraud
Since the US government will eventually have actionable knowledge concerning your foreign account doing nothing is not a viable option in the face of the draconian penalty regime at the government’s disposal.
If the IRS can prove fraud, there is no statute of limitations for assessing tax.
Some advisors are recommending that taxpayer’s merely get into compliance on a go forward basis and do nothing to address the past non-compliance
Gambling that the IRS does not have the resources to detect the foreign account.
Consider the the ease with which the U.S. government can flag TDF 90-22.1 (FinCen 114) with large balances on its radar screen. I have heard rumors that the Criminal Investigation Division (CID) has assigned a special agent to monitor for just this occurrence.
Example John Smith has just reported a 1.3 million dollar account balance in the Cayman Islands.
Hmmmm… for the last 3 years he has made $50,000 a year or so… not from previously taxed U.S. income. No 3520 was filed so not a gift. Gee… Since I can determine that the funds did not come from previously taxed earnings or from an inheritance there must be something fishy afoot here… Let’s audit this taxpayer. Matter of fact; let’s have the criminal investigation division take a look as well…
Some advisors are proponents of quiet disclosures. A quiet disclosure is where prior tax returns are amended to report the previously omitted foreign income and the delinquent TDF 90-22.1 (FinCen 114) may or may not be filed.
In a quiet disclosure the Criminal Investigation Division of the IRS is not made specifically aware of the disclosure and again the taxpayer is banking that the IRS does not have the resources to detect the quiet disclosure.
This approach has many proponents because if it successful the taxpayer only pays the additional income taxes they should have paid if they would have filed the previous returns correctly plus interest. Often, no penalties are assessed.
The problem with this approach is the IRS has stated publicly that they will criminally prosecute any taxpayer they detect has done this!!!
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