Streamlined Offshore Voluntary Disclosure Program (OVDP) for U.S. Taxpayers Residing in the U.S. Who Have Unreported Foreign Financial Accounts

There are extremely draconian penalties assessed against US residents who fail to report certain assets held in overseas accounts. Those charged are using 8th amendment, cruel and unusual punishment, challenges to mitigate those penalties.

The IRS provides an example in their June 26, 2012 FAQs wherein $1 million was deposited in an offshore account in 2005.  Over the course of the next 7 years the balance grew to $1.4 million.  In addition to taxes on the $.4 million of income and IRS penalties for willful failure to file Report of Foreign Bank and Financial Accounts (FBAR) would total $3.8 million.

On June 18, 2014 the IRS announced that US residents who due to "non-willful" conduct are in noncompliance with both FBAR and Foreign Account Compliance Act (FATCA) may qualify for the "Streamlined Filing Compliance Procedures". Previously this program was available only to nonresidents:

The Internal Revenue Service announced major changes in its offshore voluntary compliance programs, providing new options to help both taxpayers residing overseas and those residing in the United States. The changes are anticipated to provide thousands of people a new avenue to come into compliance with their U.S. tax obligations.
"Non-willful" conduct is conduct that is due to negligence, inadvertence, or mistake or conduct that is the result of a good faith misunderstanding of the requirements of the law.

The Title 26 miscellaneous offshore penalty is equal to 5 percent of the highest aggregate balance/value of the taxpayer's foreign financial assets that are subject to the miscellaneous offshore penalty during the years in the covered tax return period and the covered FBAR period. For this purpose, the highest aggregate balance/value is determined by aggregating the year-end account balances and year-end asset values of all the foreign financial assets subject to the miscellaneous offshore penalty for each of the years in the covered tax return period and the covered FBAR period and selecting the highest aggregate balance/value from among those years.

 Links to important forms and documents:

Report of Foreign Bank and Financial Accounts - FinCEN Report 114. This form must be filed electronically and has a statute of limitations of 6 years.  The due date of the Form 114 is June 30 following each calendar year.  The Form 114 was formerly known as TD F 90-22.1.

Statement of Foreign Financial Assets - Form 8938 is due with Form 1040 starting in tax year 2011 or 2012 depending upon when a taxpayer filed their 2011 tax return.

IRS Audit manual - http://www.irs.gov/irm/part4/irm_04-026-016.html.  These are the instructions given to auditors regarding penalty assessment and contains a lot of useful information.

The OVDP - Offshore Voluntary Disclosure Program Q&A for 2012.  Though we are in 2014, the 2012 program remains in effect.

Where the IRS obtains their data: http://www.irs.gov/Businesses/Corporations/FATCA-Foreign-Financial-Institution-List-Search-and-Download-Tool
At that IRS Website one can use a tool to check to see if a foreign bank has complied with FATCA regulations.  All financial institutions with an "approved status" as of June 23, 2014 are currently listed.  The list is expected to be updated every month or two, July 1, 2014 being the full effect date for foreign banks.
All US banks transferring funds overseas must withhold 30% if the transfer is to a non-FATCA bank. 
With regard to those with both unreported foreign income and accounts, though every fact pattern is different, the take away should be that FinCEN is very aggressive and: Here is our summary of cases decided just recently:
CASE 1: Mary Estelle Curran - A widow, she paid the penalty and filed amended returns on offshore accounts inherited from her husband under the 2009 OVDP amnesty program, but only after UBS had given her name to the IRS. After paying the penalties, the IRS charged her criminally, and she pleaded guilty. The judge made it clear, chastising the government for prosecuting this case, that this case never should have been prosecuted because 38,000 taxpayers had been given immunity under the same circumstances. She was sentenced to probation (since she pleaded guilty), then the sentence was revoked.

CASE 2: Carl R. Zwerner - Case settled without decision on 8th amendment issue (cruel and unusual punishment) , i.e. proportionality of excessive fines to crime.  Failed to report since the 1960's, was assessed fines totaling 145% of the account value. Tried to file amended returns for 2004, 2005 and 2006 and paid interest and penalties under voluntary disclosure. Fines were based on 50% of the account balance at the time of the violation for each year.
CASE 3: Michael Canale - Pleaded guilty in NY federal court for failure to notify the IRS of a Swiss bank account, sentenced to 6 months in prison, fined $100k and had to pay over $216k in back taxes.  His name was given to the IRS by UBS, but unlike either case above he did not come forward and try to disclose or pay back taxes, interest and penalties.

Here is what is reportable and on which form.

As discussed above, failure to report foreign financial assets can be extremely expensive.  While the "Streamlined" process now available results in a substantial reduction of penalties it is not without complexity.  If you have any questions, do not hesitate to contact the professionals at Dana S. Beane & Company, P.C.

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