If you have certain tax filing requirements in the United States and hold assets overseas, then you need to let the IRS know this. The IRS has some very specific ideas about assets in foreign countries and banks and to put it very plainly, if you have a filing requirement with the US government, you must fill out certain forms at certain times or the penalties can accrue very quickly and you may even be prosecuted on a criminal basis.
However, if you never knew about these requirements or were misinformed by a tax advisor, there is a program that may be helpful. However, this program, the Offshore Voluntary Disclosure Program (OVDP) is highly complex and it would be wise to have a tax attorney or an FBAR tax attorney help guide you through it.
What the program does, in a nutshell, is it allows you to voluntarily disclose to the IRS, all assets you hold or control overseas in a clear, orderly manner and the IRS, in turn, will likely not make any move to prosecute you on a criminal basis. However, there are still any number of fees, penalties, and taxes that will have to be paid in order to satisfy the IRS. Again, an FBAR attorney is invaluable in working this process.
Make no mistake about this program. It is not a blanket amnesty and if you hold significant foreign assets, you may have to pay a significant amount of money if you did not disclose them when the original returns were due. One form that trips up a lot of people is Form TD F 90-22.1 (Report of Foreign Bank and Financial Accounts, commonly known as an “FBAR”). United States citizens, residents and certain other persons must annually (in June every year) report their direct or indirect financial interest in, or signature authority (or other authority that is comparable to signature authority) over, a financial account that is maintained with a financial institution located in a foreign country if, for any calendar year, the aggregate value of all foreign accounts exceeded $10,000 at any time during the year. Generally, the civil FBAR penalty for willfully failing to file an FBAR can be as high as the greater of $100,000 or 50 percent of the total balance of the foreign account per violation. Non-willful violations that the IRS determines were not due to reasonable cause are subject to a $10,000 FBAR penalty per violation.
In some cases, failing to file forms such as 8938, 3520, 3520-A, 5471, 5472 and others can result in a $10,000 initial penalty followed by another $10,000 per month until you file for a maximum of $50,000. If you fail to file form 926 as an example, which concerns transferring US assets to a foreign corporation, you can get charged up to $100,000 per return, with no limit on further penalties if the IRS decides you did it on purpose.
While the financial penalties are nothing to sneeze at, the criminal penalties are even nastier. Possible criminal charges related to tax returns include tax evasion, filing a false return and failure to file an income tax return. Willfully failing to file an FBAR and willfully filing a false FBAR are both violations that are subject to criminal penalties. A person convicted of tax evasion is subject to a prison term of up to five years and a fine of up to $250,000. Filing a false return subjects a person to a prison term of up to three years and a fine of up to $250,000. A person who fails to file a tax return is subject to a prison term of up to one year and a fine of up to $100,000. Failing to file an FBAR subjects a person to a prison term of up to ten years and criminal penalties of up to $500,000. The truth is, the IRS is putting a lot of energy into tracking down foreign assets, dealing with FBAR penalties, and many other countries are cooperating in the effort.
The bottom line here is simple. For the average taxpayer, if you have foreign assets and disclosed them on your income tax return and filed form TD F 90-22.1, chances are you will have no problems. Keep in mind that there are other forms you might need to file depending on your circumstances. If you have failed to do so through simple ignorance of the law, then retain a qualified FBAR attorney and have him or her work with you to fix the problem before things get truly unpleasant.