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IRS Expands Streamlined Filing Compliance Procedures (FBAR)

07/01/2014

The IRS expanded and modified the streamlined filing procedures first offered in 2012 to accommodate a broader group of U.S. taxpayers. The IRS claims the changes will ease burden on certain taxpayers who have failed to properly report to the U.S. government certain foreign financial accounts and pay U.S. tax on income associated with the noncompliance and seeking compliance.

In general, if a U.S. taxpayer’s total aggregate balance in foreign financial accounts exceed $10,000 at any point during a calendar year, she must file FinCEN Form 114 (“FBAR”), formerly known as TD F 90-22.1, with the U.S. Department of Treasury no later than June 30 of the following calendar year.

Penalties for failure to timely file the FBAR are severe. A non-willful penalty is $10,000 per account not reported per year. If the government establishes the taxpayer’s failure to file the FBAR was willful, the penalty is the 50 percent of the maximum account balance or $100,000, whichever is greater, per violation. The FBAR penalties are separate from any penalties imposed on any additional tax due on income associated with the foreign accounts.

Streamlined Filing Compliance Procedures

Streamlined filing compliance procedures are designed to ease the burden from noncompliance for taxpayers whose conduct was clearly not willful. The IRS expanded the groups of taxpayers who may be eligible for these procedures, and also relaxed the standards required to meet the procedure requirements.

The IRS defines non-willful as conduct that is due to negligence, inadvertence, or mistake or conduct that is the result of a good faith understanding of the requirements of the law.

The IRS is now requiring taxpayers to certify that previous failures to comply were due to non-willful conduct.

However, if the IRS determines that an applying taxpayer’s previous delinquencies were willful, then the taxpayer may be subject to, among other things, criminal liability.  The IRS says taxpayers who are concerned their conduct was willful should consider participating in the Offshore Voluntary Disclosure Program.

Eligibility

The streamlined filing compliance procedures are now available U.S. individual taxpayers residing in the United States.  If the IRS has already initiated a civil examination of a taxpayer’s returns for any eligible year, then the taxpayer is ineligible.

Procedure Requirements

A.  Streamlined Foreign Offshore Procedures

For each of the three most recent years that the due date for filing a tax return has passed, taxpayers residing outside the United States must:

  1. File delinquent or amended tax returns for each of the last three years the U.S. tax return due date has passed;
  2. Pay the full amount of tax and interest due in connection with the tax return filings; and
  3. File any delinquent FBARs for each of the last six years the FBAR due date has passed.


The requirement that a taxpayer have $1,500 or less of unpaid tax per year has been eliminated.

Taxpayers who are eligible and comply with all instructions are not subject to the failure to file and failure to pay penalties, accuracy related penalties, information return penalties, or FBAR penalties. 

B.  Streamlined Domestic Offshore Procedures

The streamlined filing procedures for taxpayers residing in the U.S. are very similar to those for taxpayers outside the U.S.  However, taxpayers residing in the U.S. and seeking to enter the Streamlined Domestic Offshore Procedures must pay an offshore penalty equal to five percent of the highest aggregate balance of the taxpayer’s undisclosed foreign financial assets in the covered three year tax return period and the six year covered FBAR period.

The good news here is that taxpayers accepted into this program are paying at a much lower penalty rate than that from entering the Offshore Voluntary Disclosure Program, which is 27.5 percent. 

Offshore Voluntary Disclosure Program

The IRS Offshore Voluntary Disclosure Program is now applies to taxpayers concerned their failure to report foreign financial assets would be considered willful conduct by the IRS. The updated terms to the OVDP program apply to submissions made on or after July 1, 2014.

The general program requirements are that taxpayers seeking entry must file up to eight years of delinquent tax returns and FBARs, pay all tax, interest, and penalties associated with the previously unreported income on the disclosed foreign financial accounts, as well as a miscellaneous offshore penalty.  The general miscellaneous offshore penalty of 27.5 percent still applies, but now not across the board.

One significant change to this program is that the IRS will impose a 50 percent penalty “if either a foreign financial institution at which the taxpayer has or had an account or a facilitator who helped the taxpayer establish or maintain an offshore arrangement has been publicly identified as being under investigation or as cooperating with a government investigation.”

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