If you maintain or have maintained an offshore bank account without disclosure on your federal tax return and have also failed to properly file the Report of Foreign Bank and Financial Accounts, also known as the FBAR, you may face significant civil and criminal sanctions. The failure to file an FBAR can carry a civil penalty of $10,000 for each non-willful violation. If your violation is found to be willful, the penalty could be the greater of $100,000 or fifty percent of the amount in the account for each violation. A taxpayer convicted of tax evasion can face a prison term of up to five years and a fine of up to $250,000.
Fortunately, for those taxpayers whose noncompliance was non-willful, the Streamlined Offshore Compliance Procedures (“Streamlined Procedures”) offer substantially reduced penalties and the avoidance of criminal prosecution. On June 18, 2014, the Internal Revenue Service announced Streamlined Procedures. There are two sets of Streamlined Procedures, one for U.S. taxpayers residing in the United States, and the other for U.S. taxpayers residing outside the United States.
Streamlined Procedures For Taxpayers Residing In The United States
Central to the Streamlined Procedures is the requirement that the taxpayer’s noncompliance be non-willful. The Internal Revenue Manual defines willfulness as a “voluntary, intentional violation of a known legal duty.” The Internal Revenue Manual further states “a good faith misunderstanding of the law or good faith belief that one is not violating the law negates willfulness.” Before applying for the Streamlined Procedures as careful analysis with competent tax counsel must be performed in regards to the element of willfulness. If the taxpayer is nonwillful in his conduct he may proceed with the Streamlined Procedures if he is not currently under a civil or criminal investigation.
Under the Streamlined Procedures the taxpayer must:
- Filed Amended Tax Returns. For each of the most recent three years for the U.S. tax return due date has passed, file amended tax returns, together with all required information returns.
- FBARs. File FBARs for each of the most recent six years for which the due date has passed.
- Certification. Submit a statement signed by the taxpayer certifying (1) that the taxpayer is eligible for Streamlined Procedures; (2) that all required FBARs have been filed; (3) the failure to report all income, pay all tax, and submit all required information returns, including FBARS, was the result of nonwillful conduct; and (4) that the miscellaneous offshore penalty amount included with the filing is correct.
- Pay the Offshore Penalty. The taxpayer must pay the Title 26 miscellaneous offshore penalty equal to five percent of the highest aggregate value of the taxpayer’s foreign financial assets at any time during the covered tax return period and the covered FBAR period.
- Pay Tax and Interest. Pay all tax due on the tax returns plus statutory interest for each of the late payment amounts.Under the Streamlined Procedures the taxpayer will avoid the accuracy-related penalties, information return penalties, failure to file penalties, failure to pay penalties, and FBAR penalties.
Streamlined Foreign Offshore Procedures For U.S. Taxpayers Outside The United States
Under the Streamlined Procedures for U.S. taxpayers residing outside the United States the miscellaneous offshore penalty is not assessed. However, payment of all tax due on the most recent three years of U.S. tax returns must be made in addition to the associated statutory interest. The taxpayer will not be subject to the same penalties avoided by taxpayers residing in the United States.