So a few months ago on this blog we informed you that the IRS offered a new FBAR amnesty program (now the 3rd program it’s offered), but that it only had released the broad stokes of the program (see our entry from February 16, 2012, for our last discussion of this topic). Since then, the IRS has established new procedures for dual citizens who have foreign bank accounts but who have paying the appropriate tax on the amounts in the those accounts in the foreign country at issue. Taxpayers with this situation can resolve it rather easily without having to go through a formal amnesty program (see our post from July 5, 2012, discussing this new option). However, that program won’t be available for everyone, and for the rest there is now the 2012 Overseas Voluntary Disclosure Program (the “OVDP”). On June 26, 2012, the IRS issued a set of Frequently Asked Questions and Answers (this is new guidance to assist taxpayers under the 2012 OVDP).
Again, recall US tax citizens or residents must file a “FBAR” (a “Report of Foreign Bank and Financial Accounts”) annually, provided the US citizen or tax resident has over $10,000 in financial account(s) which are not located in the United States. The term financial account includes any savings, demand, checking, deposit, or other account maintained with a financial institution in addition to certain annuity and life insurance contracts, commodities and precious metals and safe deposit accounts. The FBAR is filed on a US Treasury Form TD F 90-22.1, by June 30 of the year after the US citizen or resident had a non-US account.
So What Are Broad Strokes of the 2012 OVDP?
Largely, we’ve already discussed basics of the 2012 OVDP in our prior posts, since the amnesty program remains very similar to the 2011 amnesty program. Taxpayers going through program will have to make a very important decision.
Option One- No Questions Asked. The taxpayer chooses pay a one-time penalty of 27.5% of the highest aggregate overseas account(s) balance in the highest year. So if the aggregate overseas account balance in the highest year (of all the years when the individual did not file a FBAR) was $2,000,000 (and by the way, when we say highest aggregate overseas account balance we are including the value of overseas assets- such as a house- plus the value of overseas accounts), the taxpayer is volunteering to pay a penalty to the IRS of $550,000 (27.5% x $2,000,000), plus the unpaid income tax (if any), plus penalties for failure to file or pay income tax (if any). That stings, no question.
Option Two- Roll the Dice for a Lesser Penalty. The taxpayer asks for a lower penalty than the 27.5% general amnesty penalty (which required a payment of at least $550,000 for a $2,000,000 overseas aggregate account balance above). But this is a gamble with big stakes. If the IRS agrees that the taxpayer is entitled to a lesser penalty based on the facts of the case, then great. But if the IRS doesn’t agree, the taxpayer can lose big. In fact, if upon review the IRS believes that the taxpayer’s failure to file a FBAR was “willful”, they can take EVERYTHING in the foreign accounts (maybe more). The taxpayer cannot elect option two and roll the dice if the facts of his case have even the whiff of a willful failure not to file FBARs. So what factors suggest to the IRS a taxpayer willfully failed to file a FBAR???
How Do I Know if the IRS will Consider My Failure to File FBARS a Willful Failure, so That I Better Take the 27.5% No Questions Asked Penalty?
So this is really where the rubber meets the road on the 2012 OVDP FBAR amnesty. I need to know whether my case is too risky to ask for the opt-out, and just accept the 27.5% one-time penalty. I must accept the 27.5% penalty if there is a decent chance the IRS will deem my failure to file FBARs as willful. What is a willful failure to file? While there are no concrete answers to this, here are some factors (which come both from the 2012 OVDP Q&A guidance and from our own discussions with the IRS):
1) If the taxpayer has large, unreported taxable gains attributable to the overseas account(s), this is a negative factor (e.g., you got a Swiss account which you haven’t filed a FBAR for and you trade stocks in the account and had some major gains and a lot of tax due in the US from these gains…you should probably take the 27.5% amnesty deal…see Q&A 51.2 of the new ODVP guidance).
2) You failed to check the box on Part III of the Schedule B of the Form 1040 that states you had foreign bank accounts. It’s one thing not to file FBAR’s annually, but it’s another thing to fail to state on your personal income tax return that you had any foreign bank accounts. That is not a good factor for someone looking for the opt-out deal.
3) You failed to pay the appropriate tax in the foreign country at issue. It looks better if while failing to file FBARs and paying tax in the US, you were at least tax compliant in the foreign country at issue. Note that if you paid the correct tax overseas, it’s quite possible (due to the tax credit system) that you have $0 US tax owed. If you paid the correct tax to the foreign country at issue, that’s a very positive factor.
Make a Calm, Objective Decision on Whether to “Opt-Out”
In our experience, there is natural inclination for clients not to want to accept the 27.5% (of the highest aggregate foreign account balance(s) in the highest year) penalty. This is understandable. But again, you need to calmly and objectively assess your case before you make the critical decision of whether to opt-out of the no questions asked 27.5% penalty. The stakes are huge (you could lose the entire value of these accounts if you’re wrong). If you haven’t declared your overseas bank accounts yet, and you are increasingly worried about the IRS and the Department of Justice discovering them, we strongly recommend you give us or a competent tax attorney a call to review your case.
We’ll talk about how long the new FBAR 2012 Amnesty Program is expected to last, and other features of the program, in our next post.