When most people think of foreign accounts, they think of ex-pat living overseas and utilizing banks for the accumulation of their payments.  However, many taxpayers may also be subject to the federal Foreign Bank and Financial Accounts or FBAR reporting without realizing it.  The United States Treasury Department’s Financial Crimes Enforcement Network (FinCEN) 114 form is filed alongside taxpayers’ federal tax return and reports information for those that have a financial interest or signature authority over a foreign financial account.  Financial interest is defined as: directly owning an account; directly owning or indirectly owning more than fifty percent of a corporation’s voting power and/or shares when that corporation owns an account; directly owning or indirectly owning more than fifty percent of a partnership’s profits or capital when that partnership owns an account, or directly owning or indirectly owning more than fifty percent of the voting power, total value or the equity interest or assets, or interest in profits of any entity that owns an account.  It is important to note that disregarded entities that have no other filing requirements may still have an FBAR requirement.  Signature authority is more broadly defined as:  the authority of an individual (alone or in conjunction with another) to control the disposition of money, funds, or other assets held in a financial account by direct communication (whether in writing or otherwise) to the person with whom the financial account in maintained.  Here it is important to note that officers and employees may delegate the filing of Form 114 under this definition to another, but they still remain personally liable for any delinquent filing.  It is important to know what accounts your company has stakes in if you have signature authority over any company accounts.

The FBAR was created to uncover funds being hidden offshore.  And while it has been around for quite a while, the Internal Revenue Service has not seriously enforced it until recently.  For most filers, you will be required to complete Part III of Schedule B of Form 1040 and Form 8938 as part of your tax return, as well as Form 114 which is filed separately.  Bear in mind that the FBAR and other foreign reporting forms are not taxation related forms.  They are simply balance reporting forms so that the IRS is aware of overseas monies.

Individuals, corporations, partnerships, limited liability companies, trusts and estates are all subject to foreign reporting if they meet the threshold requirements.  The current threshold amount for reporting is $10,000 of your combined foreign accounts at any given time during the calendar year.  Heavy penalties are enforced if a taxpayer meets these requirements but fails to file the proper form(s), even if they did not know that they had a requirement to file.  These fines can be anywhere from $10,000 to $100,000 or fifty percent of the account balances, depending on the reason for not filing and the amount of your account balances at the time of the violation.  Over the last ten years, after the introduction of the penalties, the filings for FBAR reporting increased from two-hundred—eighty-thousand to over one million.

As many taxpayers were unaware that they had filing requirements in accordance with the Foreign Account Tax Compliant Act (FATCA), in 2009, the IRS established the Offshore Voluntary Disclosure Program which allowed taxpayers to alleviate civil penalties and lower the risk of criminal prosecution for failing to disclose offshore accounts.  It is important to note that the OVDP is different than filing a delinquent FBAR and/or Form 8938 and understanding which is more beneficial to the taxpayer is crucial before applying.  The OVDP is used generally by taxpayers that have criminal tax exposure with respect to non-willful noncompliance of their tax situation.  Non-willful tax violation means that you did not intentionally try to evade your tax reporting, may not have been aware of your reporting requirements, may not have been aware that your aggregate total in your foreign accounts reached the threshold, or you did not properly convert the account to the USD value and understand that there it met the filing requirements.  Other violations include not understanding which accounts fall under the aggregate account definition, and or which accounts you have signature authority over.  And while filing the OVDP can mean that you can avoid some of the more severe penalties, it can mean that the taxpayer is found to have underreported their foreign income and taxes can be due, including “failure to file” and “failure to pay” penalties and interest, as well as the “in lieu” penalty.  In exchange for not being penalized criminally, the filer agrees to pay back the penalties.  A taxpayer does have the option to opt-out of the OVDP, but that means that the IRS can come after you for criminal penalties, although this is rare is you have substantial evidence that you non-willfully failed to report.  If you are facing OVDP penalties of fifty percent or greater of your account values, then opting-out may be an option.  Filing delinquent FBAR, in these cases, may mean paying less in tax penalties.

Recently, the IRS announced that it is closing the OVDP.  Although the program was successful in incentivizing taxpayers to report their foreign transactions, the use of the program has steadily declined in recent years.  More and more taxpayers are utilizing proper reporting techniques, and this led to only 600 filed cases in 2017.  However, the closing of the program should not lead to the assumption that the IRS will stop combating offshore tax evasion and noncompliance issues.  Historically, the OVDP has evolved over the years, and a new version may manifest in the coming period.  Alternatives to the OVDP are currently available to taxpayers wishing to disclose.  Taxpayers are encouraged to utilize the IRS Streamlined Voluntary Disclosure Submission Process, the IRS Criminal Investigation Voluntary Disclosure Program, the Delinquent FBAR, or the Delinquent International Information Return.

Due to the complexities involved with each of these filings, it is advisable to seek the advice of an experienced OVDP attorney prior to making any disclosures.

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