Your Field Guide To Foreign Account Disclosure Programs- Which Is Your Pick?

There is a lot of buzz going around these days about FBARs, foreign accounts, foreign corporations, IGAs, tax treaties, more & more Swiss banks on the roll-call list, you name it and they cry "FATCA"! Confusion all-around, fear mongers are having a field day, may be rightfully so, fines are high and penalties higher. People are ready to hit the panic button. Or so one would think! 

To quote my favorite Buddhist teacher, Thich Nhat Hanh here, “People have a hard time letting go of their suffering. Out of a fear of the unknown, they prefer suffering that is familiar.” 

If you are wondering what a Thich Nhat Hanh quote is doing on a tax blog but you have one hand hovering over the panic button, just think about it...without going into many of Buddhism's wonderful practices let me assure you, do decide to end your suffering, however first- DON'T PANIC! Second, hire yourself a good Enrolled Agent who specializes in foreign tax matters. And third, look through your options. 

The Internal Revenue Service (IRS) has offered several formal offshore voluntary disclosure programs or initiatives since 2009. These programs are for those qualifying taxpayers who would like to come forward and disclose their foreign bank accounts in exchange for reduced penalties and a promise not to be criminally investigated. This was called the Offshore Voluntary Disclosure Program or the OVDP.  

This was updated in June of 2014, and major changes were brought to the OVDP, some penalties were increased from 27.5% to 50%. The IRS also announced the Streamlined Compliance Filing Procedures for US Citizens living abroad and then expanded that to include US citizens living in the country. There are also some other disclosure programs that can be used if you qualify. 

In the post today, we will touch briefly on each disclosure program: 

A. The Offshore Voluntary Disclosure Program {OVDP}: 

Taxpayers can avoid a long list of potential penalties by participating in the OVDP. They would have to submit to a standard, uniform penalty structure administered through the OVDP. Under the 2014 OVDP, participating taxpayers agree to pay a penalty equal to 27.5% of the highest year's aggregate value of OVDP Assets during a period that covers the past eight years, along with any applicable failure-to-file, failure-to-pay, and accuracy-­related penalties.

One has to go through a preclearance request process to determine if the taxpayer is eligible for the OVDP. Once the preclearance is received from the IRS, the taxpayer can go ahead and file the OVDP. The process of filing the OVDP is very complicated and arduous. It is not recommended you go through this as a DIY project.   

B. The Streamlined Compliance Filing Procedures:

The Streamlined Filing Compliance Procedures are available to both qualifying US citizens living abroad and withing the country. The taxpayers filing under this program have to certify that their failure to report their foreign bank accounts/ financial assets and pay all tax due in respect of income from it was not due to willful conduct. 

Under this process, the $1,500 tax threshold and the risk assessment process associated with it have been eliminated. It is open to both eligible individual taxpayers and to the estates of individual taxpayers.The taxpayers or their estates must have valid Tax Identification Numbers (TINs) and they must pay any previous penalty assessments on their delinquent returns before participating under the Streamlined Compliance Procedure.   

C. Delinquent Foreign Bank and Financial Accounts or FBARs Submission Procedure:

If you have properly reported your income from your foreign financial assets and paid all tax on timely filed US tax returns, the IRS will not impose a penalty on your failure to file the delinquent FBARs. 

More detail on my recent blog post here on this procedure.  

D. Delinquent International Information Return Submission Procedures :

Taxpayers who do not qualify to use the OVDP or the Streamlined Filing Compliance Procedures can use this procedure if they have not filed one or more required international information returns and have a reasonable cause for not doing so in a timely manner. As a part of the reasonable cause statement under this procedure, the taxpayer must certify that any entity for which the information return is being filed did not engage in tax evasion.  Without the reasonable cause statement attached, penalties may be assessed. 

You CANNOT use any of the above programs if:

1. The Internal Revenue Service has already initiated a civil examination or criminal investigation of the taxpayer OR 
2. Has notified the taxpayer that it intends to begin an examination or investigation OR 
3. If it has already received information from a third party (e.g., informant, other governmental agency, or the media) alerting it to the specific taxpayer's noncompliance OR
4. If it has acquired information directly related to the taxpayer's specific liability from a criminal enforcement action. 

Under all the programs, the taxpayer must make good-faith arrangements to satisfy the tax, interest, and penalties determined to apply. Please consult with an Enrolled Agent who specializes in these matters to decide which of these programs would be best suited to your needs. 

Bibliography: Internal Revenue Manual; irs.gov; Legal Information Institute; AICPA Resources- Tax Advisor 

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As always, read my disclaimer here. Please consult a qualified tax professional for your unique tax needs. More of my contact information is on my website, www.mntaxsolutionsllc.com.