An opinion for you to evaluate amongst the plethora of technical articles.
I speak with “criminals” on a daily basis regarding their unfiled FBAR forms and the potential penalties. As a result, I’ve heard as many different “strategies” on how to deal with them, and since jail would have been a likely result had they carried on with them, I feel like I should share some important information with all the other “criminals” out there. I must confess, I feel calling non-filers “criminals” sounds a bit harsh, but the reality is that from the perspective of the IRS and the IRS code (aka “the law”) you are considered a “criminal”.
However, before I share my opinion, I’ll go ahead and copy paste something I’m supposed to post at the end of any article I write:
Every effort has been taken to provide the most accurate and honest analysis of the tax information provided in this article. Please use your discretion before making any decisions based on the information provided – and understand that if you have FBAR issues you should not be trying to address them yourself. Hire a Tax Professional, if you do not, this will count against you in tax court, if it ever came to it. This blog is not intended to be a substitute for seeking professional tax advice based on your individual needs – one small fact can introduce a new set of factors to be analyzed.
By the time you find this article, you will already have at least two options for dealing with your late FBAR’s in your mind:
1. Not do anything.
2. Join the Offshore Voluntary Disclosure Initiative (OVDI)
And you will have reached that conclusion after reading a myriad of articles online and as a result feel scared, bullied, and even further from the answer you set forth for: “What should I do about my unfiled FBAR forms?”. You probably have no clear understanding of the penalties that will be due either.
I will explain both of the above options and a third and fourth option that you may not even be aware of.
1. Not Do Anything
This is the worst course of action, in my opinion. The enforcement efforts by the IRS are unprecedented, – even in light of the recent budgetary crisis, the IRS requested to increase their workforce by at least 5,100 agents in 2012. They have unprecedented tools at their disposal and they have dramatically increased in the last few years, such as: Information sharing agreements, tax treaties, a team dedicated to uncovering offshore financial assets, and coming in 2013 the ultimate tool: FATCA.
Now, I understand that there are going to be plenty of glitches during the implementation process (as well as innocent bystanders), and that how effective FATCA is as it relates to FBAR penalties depends on the quality of information collected and shared by those foreign banks, but the part that many readers may not understand is that I’m not thinking 3 years from now. Not even 10. I’m thinking about the 40 year old in this situation, who decides not to do anything about this and continues to go year after year without complying with his reporting requirements (A dual national living in the other country for example). There is no statute of limitations for an unfiled FBAR form. 15 years from now, once this person is getting ready to enjoy his retirement savings, the IRS could come after him. See, I do believe that 15 years from now these governments will be able to and in fact will share accurate and timely information, ignoring the reasonable pleas by their constituents for a better designed code , as well as their own generated proof that they are being unfair.
It’s like a kid not coming forward right after breaking that vase. He knows he’s already in trouble, why wait for her mother to realize that the vase is missing? It’s her favorite vase…
2. Join the Offshore Voluntary Disclosure Initiative
If it weren’t for a reason I’ll explain after an introduction to this alternative, this may seem at first look to be the best option. One may perceive this option to be the “Lesser of many evils”, “El menos pior”, “le moins pire”. Of course, it is the most expensive option, both in terms of professional fees as well as FBAR penalties due to the IRS with the exception of not doing anything – not filing. Nevertheless, as I will explain, I don’t really consider this the best option, and I hope you don’t either after reading the following.
Despite what you’ll hear from an attorney that will charge you $5k+ to enter you into the program, it is incorrect that the OVDI is the ONLY alternative. In fact, I have heard it from IRS representatives themselves (I’m talking senior directors) that they are annoyed with attorneys sending them people into the program JUST BECAUSE they had unfiled FBAR forms.
Off the bat, you are looking at 5-25% of your in penalties (that’s your end of the deal).
The biggest advantage of the OVDI is the dropping of criminal charges. While not filing already makes you a “criminal”, that can easily be defended as long as you were not intentionally, specifically going out of your way to hide these assets – and more importantly the taxable income it produces. So if all you did was not know about your filing requirement, there are other ways you can get out of the criminal charges. Although I must say that the only way to know for 100% sure no criminal charges will be brought up, the OVDI is the only route.
The second biggest advantage is the peace-of-mind you get by knowing this will never, ever come up again.It’s a closed matter (if done properly).
The above are what I believe most people consider as their options. Here are two more:
3. “New Streamlined Filing Compliance Procedures for Non-Resident, Non-Filer U.S. Taxpayers”
If you have not resided in the USA since January 2009, haven’t filed a tax return since then (or earlier), and owe less than $1,500 in taxes for the last 3 taxable years where you have a filing requirement, you could submit your late FBARS under the new “Streamlined Procedure”.
Of course, less paperwork and a faster track is definitely appealing for those expats with unfiled tax returns, but at what cost?
“For returns determined to be high risk, failure to file and failure to pay penalties may be imposed in accordance with U.S. federal tax laws and FBAR penalties may be imposed in accordance with U.S. law.” And as much as “high risk” is defined in their program , I can see someone not really high-risk being flagged as such (I’m not the only one, the IRS itself has realized that they’re bullying taxpayers)
Keep in mind with this option, payment is due right away for the accompanying tax returns, as opposed to having access to payment plans or offers in compromise.
4. Quiet Disclosure
A quiet disclosure really applies to amending returns to include previously unreported income related to FBARS, but is also refered to when simply sending in your late FBARs, and hoping any action the IRS would otherwise take falls through the cracks (I’m not considering the scenario where you amend and include previously intentionally underreported income for purposes of this article).
The IRS set forth on what I personally consider a witch hunt; one that will not produce as good as ROI as if they focused on other problem areas. And it worked. The number of expats coming forth with their unfiled tax returns has been overwhelming, and given that you cannot e-file tax returns after a certain amount of time – it’s all paper waiting to be processed by humans at the processing center.
Yes, there are built in controls that trigger audits and collections, but those processes are flawed. “No way the IRS has flawed processes”? Really? How about a FOREIGN person receiving a letter from the IRS demanding $34 Million, having their US bank accounts levied, only to have us determine, defend, and have the IRS certify that their tax due was really zero? Please don’t think all our clients are millionaires. No client is too small for us. Too big? Yes, sometimes. We’d never take a case we didn’t feel 100% that our qualifications and experience would serve our client well.
I guess people following this procedure are hoping that by the time the IRS realizes they have additional questions on the tax return, or would like to assess penalties, the statute of limitations will have run out. You see, the IRS has 3 years from the time you file your FBAR to assess penalties or otherwise ask questions.
And as much as the IRS clearly discourages this procedure for amended FBARs, it’s not actually illegal.
The above are what I consider the most popular options, but remember you are already in a bad situation – the IRS considers you a “criminal” and you are at risk of losing a significant portion of your foreign financial accounts to penalties due to ignorance of the law on reporting requirements (that don’t even result in taxes being assessed if filed as required).
There are of course a myriad of details and pitfalls for all the scenarios above, as well as other entirely different options, “trade secrets” that have allowed our clients to overcome this FBAR nightmare. If you believe your situation may be even more complex, submit your information here for a no charge consultation.
And what you had all been waiting for – there are many others that are risky, blatantly criminal and do not make any sense under tax law or even economic sense:
– Close my account, wire it to my non-resident alien Wife’s account, and start reporting from scratch next year. (Smart. But criminal)
– Put all my money under a foreign corporation, since the IRS has not jurisdiction over it. (Not effective. Actually gets you in deeper trouble).
– Close my account, wire it back to the US. (And your answer when they ask you where that money came from will be what?)
– The dog ate my FBAR.
– I am a dual Citizen. Open an offshore bank account under my foreign credentials, wire the money there, and close the old account. (Criminal. Creates more problems and a better paper trail).
– Renounce my US Citizenship. (You must be up to date with all your tax obligations in order to be able to expatriate).
– Throw it all into a life insurance policy with cash value that invests in mutual funds, through an offshore broker. ( PFIC is the complication you introduce here – And you still have the issue of the unfiled FBARS, and now your tax rate for capital gains will be higher and your tax preparation fees increase at least $600 )
– Put all the money into a foreign trust. ( Form 3520. You still have the issue of the unfiled FBARS, and now your tax rate for capital gains will be higher and your tax preparation fees increase at least $600 )
– Spend it all before they catch me.