Foreign Bank Account Reporting – How to Avoid Excessive Penalties

Since the UBS tax evasion controversy that picked up in 2008, the federal government began looking for all possible ways to increase their tax revenue. Nowadays, the prime targets for the IRS were the U.S. taxpayers with undeclared offshore accounts. They set out to find and prosecute the non-compliant individuals with hefty FBAR penalties. The IRS has decided to target the wealthy taxpayers by scrutinizing their returns, just hoping to find someone with unreported offshore income.

The severity of FBAR penalties
It is absolutely legal for US citizens and residents to hold foreign bank accounts. Individuals have offshore accounts for a variety of legitimate reasons, including those that have family in a foreign country, those accounts that are inherited and those who want to facilitate transactions for business purpose. These people are usually dual citizens who play an important role in the economic growth of our country. But the sad truth is, the U.S. asserts universal taxation legal power over all income of an individual, regardless of the location of the paying source yielding the income or revenue.

FBAR penalties are assessed per account value; it is not calculated on your income or per unfiled FBAR. Further, the penalties will be assessed for each account for each year there is a violation that could end up with extreme disproportionate penalties. As an example, if you have $600,000 in your offshore account, the IRS can impose $300,000 as penalties - for just one year. For two years, the willful FBAR penalties could eat up your entire amount on the bank account. You see, the IRS will not necessarily have to stop here. They could potentially calculate penalties for 6 or more years that can put you in a position of negative equity.

What are your options to avoid FBAR penalties?
The following are some of the options for people qualifying to disclose under the voluntary disclosure program.

Standard OVDP with 27.5% penalty: Intended for people with some bad facts on their side, the standard 27.5 percent offshore penalty ("in-lieu-of-FBAR penalties") is applied to the taxpayers' "offshore assets" at the time where they were highest in value during the OVDP period.

50% Offshore Penalty: This applies to taxpayers with offshore accounts where public disclosure has been already made on the financial institution. The 50% Offshore Penalty will be evaluated on the highest aggregate value during the eight years covered under the OVDP.

Domestic Streamlined OVDP: This is for only to non-willful taxpayers who are living in the US and are willing to pay a penalty equal to 5% of the highest year-end account balance.

Streamlined OVDP offshore: Taxpayers residing outside the United States would be eligible for a 0% offshore penalty as long as they meet the requirements.

Voluntary Disclosure: In case your OVDP is turned down as you are under investigation, it is advisable to try to enter into a regular IRS voluntary disclosure program or at the minimum get ready for trail.

FBAR only: The IRS may not impose a penalty for taxpayers who didn't file missing FBARs if there are no unreported tax liabilities on their foreign income.

OVDP Opt-out: A taxpayer may elect to "opt out" if he/she disagree with the application of offshore penalty or other settlement structure of 2014 OVDP and want to have their case handled under normal audit process. A FBAR warning letter, Letter 3800 or non-willful penalty is the ultimate goal of any opt-out.

Being under investigation for unreported foreign account
If you are under audit for having significant unreported offshore income or at high risk for criminal prosecution, you need to get legal protection by hiring a tax attorney specialized in handling FBAR cases. Criminal penalties for FBAR violators include a fine of $250,000 along with 5 years of imprisonment. Moreover, the assessment of a civil penalty will be done separately in addition to criminal FBAR penalties.

Either way, get an expert opinion from an experienced FBAR attorney who can help you determine if are at high risk for criminal prosecution. They will help in bringing your offshore account into IRS compliance and minimize your criminal exposure to the IRS.