New IRS Streamlined FBAR Program an Attractive Solution for Many, - - PDF document

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New IRS Streamlined FBAR Program an Attractive Solution for Many, Trap for Some

Materials for the February 27, 2015 Meeting of the Tax Section of the Allegheny County Bar Association Stephen J. Pieklik, Esq. Williams Coulson Johnson Lloyd Parker & Tedesco, LLC One Gateway Center, 16th Floor Pittsburgh, PA 15222 412-454-0229 spieklik@williamscoulson.com

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New IRS Streamlined Program an Attractive Solution for Many, Trap for Some On June 18, 2014, the IRS overhauled its foreign account disclosure programs. The most significant changes were with respect to the Streamlined Filing Compliance Procedures (the Streamlined Program). The changes are beneficial for many (if not most) taxpayers with undisclosed foreign accounts. However, the Streamlined Program is not for everyone as it is limited to those whose failure to report income and file Foreign Bank Account Reports (FBARs) and similar information returns was due to "non- willful conduct.” Background U.S. citizens and resident aliens must disclose and pay taxes on their worldwide income. U.S. taxpayers must also disclose certain foreign bank accounts with an aggregate balance exceeding $10,000 on an

• FBAR. Starting with the 2011 tax year, U.S. taxpayers may also have to report foreign bank accounts and

financial assets on IRS Form 8938. For a variety of reasons, U.S. citizens and residents have failed to pay taxes on their worldwide income and report their foreign banks accounts on FBARs and Form 8938. Since 2009, the IRS has had a formal

• ffshore disclosure program. The offshore disclosure program (which was modified in 2011 and 2012)

provided certainty for taxpayers wishing to come in compliance, but the program required taxpayers to pay eight years of back taxes, a 20% accuracy penalty, and an FBAR non-reporting penalty ranging from 20% to 27.5% of the aggregate offshore account balance. In 2012, the IRS announced a no-penalty, streamlined program for nonresidents who failed to report their foreign income and file FBARs (and similar information returns). The program was incredibly attractive, but was only open to nonresidents who failed to file their tax returns and owed less than $1,500 in U.S. tax for each of the last three years. What Changes did the IRS make to the Streamlined Program? The New Streamlined Program loosens the qualification requirements of the attractive 2012 streamlined program by:

• 1. Opening up the Streamlined Program to U.S. residents and nonresidents.
• 2. Opening up the Streamlined Program to those who previously filed tax returns, including those

who previously made “quiet disclosures.”

• 3. Eliminating the $1,500 tax due limitation.

However, the New Streamlined Program is not open to those under audit or criminal investigation. Nor is it open to those who have been previously contacted by the IRS concerning their failure to file FBARs

• r other information returns.

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What Do Taxpayers have to Pay to Participate in the New IRS Streamlined Program? Compared to those participating in a traditional offshore voluntary disclosure, taxpayers participating in the New Streamlined Program pay significantly less in tax, accuracy penalty, interest, and information return penalties. The following table summarizes the differences. Item Traditional Offshore Voluntary Disclosure Streamlined Program Tax 8 years of back taxes, plus interest 3 years of back taxes, plus interest Accuracy Penalty 20% of tax, plus interest No accuracy penalty imposed Non-Reporting (FBAR )Penalty Generally 27.5% of highest aggregate balance during last 8 years For nonresidents: 0% For residents: 5% of highest year- end balance during last 6 years What is Non-Willful Conduct for Purposes of the IRS Streamlined Program? The New Streamlined Program is only open to those whose failure to report income and file information returns is due to “non-willful conduct.” The IRS defines non-willful conduct as "negligence, inadvertence, or mistake or conduct that is the result of a good faith misunderstanding of the requirements of the law.” The test is somewhat curious in that it employs both an objective standard (negligence) and subjective standard (good faith misunderstanding). This can be a difficult standard to apply, especially when taxpayers:

• 1. Have an account in a bank secrecy jurisdiction
• 2. Have a numbered account at their foreign bank
• 3. Have a “hold mail” or similar agreement with their foreign bank
• 4. Hold the account in a trust, foundation, or other entity
• 5. Made large cash withdrawals
• 6. Moved funds from a foreign bank under U.S. pressure to another foreign bank
• 7. Had face-to-face-meetings with foreign financial advisors in foreign countries

Before participating in the New Streamlined Program, every taxpayer should evaluate the facts and circumstances surrounding their failure to report income and file information returns, preferably with the help of experienced U.S. tax attorneys. What Documents are Required to Participate in the New Streamlined Program? Taxpayers are generally required to:

• 1. File three years of original or amended tax returns, together with information returns which are

required to be filed with income tax returns (including Forms 3520, 5471, and 8938).

• 2. Complete and sign, under penalties of perjury, a Certification that the failure to report income

and file information returns was due to non-willful conduct.

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• 3. Pay back income tax and interest (and 5% nonreporting penalty for U.S. residents) for three

years.

• 4. File any elections that may be required with respect to foreign retirement or savings plans.
• 5. File six years of back FBARs.

What Factors Should Taxpayers consider when Deciding Whether to Participate in the Streamlined Program? Each foreign account case is unique and a variety of factors should be explored. Common factors include:

• 1. How much income was unreported?
• 2. Was the foreign income subject to foreign tax?
• 3. Is the foreign income material with respect to U.S.-source income?
• 4. How much was on deposit in foreign banks?
• 5. What information has my CPA or other tax professional sent to me concerning foreign bank

accounts (organizers, client letters, etc.)?

• 6. Was the foreign account question at the bottom of Form 1040, Schedule B accurately

completed?

• 7. Was the amount on deposit ever subject to U.S. tax?
• 8. How much time remains on the applicable statutes of limitations?
• 9. Is my foreign bank cooperating with the United States Department of Justice?
• 10. What would happen at an IRS audit if I elected not to participate?