The US is one of the few countries that imposes tax on the worldwide income of its residents. US residents are required to file a Report of Foreign Bank and Financial Account (FBARs) if the aggregate account balance of the accounts exceed $10,000. The Foreign Tax Compliance Act (FATCA) added the international information return filing requirement of Form 8938, Statement of Specified Foreign Financial Assets. Generally, the IRS can only audit a tax return for three years. However, the failure to file international information returns stops the statute of limitations until the international information returns are filed. Civil penalties start at $10,000 for each unfiled international form for each year. The typical international information returns are Forms 8938, 5471, 5472, 3520, 3520-A and 926. Willful failure to file international information returns leads to criminal penalties. The IRS is now conducting FBAR audit examinations in search of unreported foreign income.
For non-filers, the IRS offers several offshore voluntary disclosure options for taxpayers to properly report their worldwide income and file their international information returns. The following options have different levels of protection, filing requirements and penalties.
- The Offshore Voluntary Disclosure Program (OVDP) offers criminal protection for taxpayers who willfully failed to report their foreign income and file FBARs. The taxpayer is required to file eight years of amended tax returns and eight years of FBARs. In addition to paying the back taxes and related interest and penalties, a 27.5% offshore penalty will be based on the highest aggregate value of the tax non-compliant foreign assets.
- The Streamlined Domestic Offshore Procedures are for taxpayers who non-willfully failed to report their foreign income and file FBARs. Taxpayers need to provide a detailed certification narrative explaining the non-willful conduct. The taxpayer is required to file three years of amended tax returns and six years of FBARs. In addition to paying the back taxes and related interest and penalties, a 5% offshore penalty will be based on the highest aggregate value of the foreign accounts.
- The Streamlined Foreign Offshore Procedures contains the same provisions as the Streamlined Domestic Offshore Procedures with a few differences. These procedures are for taxpayers who live outside the US and there is no offshore penalty.
- The Delinquent FBAR Submission Procedures are for taxpayers who timely reported and paid taxes on all foreign income and provide a statement why the FBARs were late filed. There are no penalties for these procedures.
- The Delinquent International Information Return Submission Procedures are for taxpayers who timely reported and paid taxes on all foreign income and provide a statement why the international information returns (i.e. Forms 8938, 5471, 5472, 3520, 3520-A and 926) were filed late. There are no penalties for these procedures.
- Lastly, a Quiet Disclosure involves filing the amended tax returns and international information returns outside of the IRS disclosure options. This is a risky approach because the IRS could potentially impose civil penalties that are larger than provided in the other disclosure options.