By Christopher C. Humes, CPA

As the world has become financially intertwined, a growing number of taxpayers are required to submit additional forms and disclosures as part of their annual tax return filings. Unfortunately, foreign financial accounts and property owned overseas can result in unintentional noncompliance with IRS and U.S. Treasury rules and regulations. The penalties for noncompliance are substantial. For example, the failure to file a Form 114, Report of Foreign Bank and Financial Accounts (FBAR), carries a civil penalty of $10,000 for each nonwillful violation. For a willful violation, the penalty is the greater of $100,000 or 50 percent of the amount in the account. Furthermore, each year that an FBAR isn’t filed is considered a separate violation, and the resulting penalties are treated as such. In other words, they add up.

The IRS announced on March 23, 2018, that it will close the 2014 Offshore Voluntary Disclosure Program (OVDP) effective Sept. 28, 2018. This program began in 2012, and was extended in 2014, to allow taxpayers to come forward and make required filings and pay taxes in cases where the reason for noncompliance was willful misconduct. The IRS noted in its announcement that it had previously stated this program would close at some point, but it had been successful in increasing in awareness of offshore tax and reporting obligations.

To make sure you are not inadvertently putting yourself at risk, you must first understand what a foreign financial account is. As the name suggests, it is a financial account located outside the United States. So, an account maintained with a branch of a U.S. bank that is physically located outside the United States is a foreign financial account. Conversely, an account maintained with a branch of a foreign bank that is physically located in the United States is not a foreign financial account. The most commonly asked question I get is about international mutual funds held in brokerage accounts. So long as the brokerage account is maintained at a U.S. branch, it is not subject to foreign account reporting.

The most commonly required forms for individual taxpayers include the following:

Form 114, Report of Foreign Bank and Financial Accounts (FBAR) – The form is filed separately from a taxpayer’s Form 1040. In conjunction with completing the questions in Part III of Schedule B (Interest and Dividend Income), any “yes” answers potentially require the taxpayer to complete the FBAR form. The purpose of this form is for a U.S. person to disclose a financial interest or signature authority over a foreign financial account to the Treasury Department’s Financial Crimes Enforcement Network (FINCEN). Bank accounts, securities accounts, and trust accounts that are maintained in a foreign country with an aggregate value exceeding $10,000 at any time during the calendar year require disclosure. FINCEN automatically grants an extension of time to file, from April 15 to Oct. 15, to report assets owned the previous calendar year.

Form 8938, Statement of Specified Foreign Financial Assets – This form is completed in conjunction with answering the questions in Part III of Form 1040 Schedule B, and is submitted along with a taxpayer’s annual Form 1040 filing. This form requires identification of the specific foreign accounts, and identifies the tax form or schedule and the line where the tax items attributable to those assets (i.e., interest, dividends, royalties, gains/losses) are reported on the Form 1040.

With all of the above as background, what can you or your tax preparer do when it is discovered there is a foreign financial account and income associated with that asset that hasn’t been properly reported? There are remedies available to reduce the substantial penalties for noncompliance.

First, the 2014 OVDP program is still available until Sept. 28, 2018. However, taxpayers and practitioners must ensure complete submissions – partial or incomplete submissions will not be accepted. This program allows taxpayers who are concerned that their failure to report income, pay tax, and submit required information returns was due to willful misconduct to gain assurance that they will not be subject to criminal liability or substantial monetary penalties.

The Delinquent FBAR Procedures and Delinquent International Return Procedures will still be available after Sept. 28, 2018. These procedures enable taxpayers who are otherwise compliant with tax return reporting, but may have overlooked filing the proper information reports (i.e., Form 114), to come into compliance by making all required filings.

The Streamlined Filing Compliance Procedures also remain available after the OVDP closes. However, only taxpayers who can certify under penalties of perjury that their failure to report all income, pay all tax, and submit all required information returns was due to nonwillful conduct, may use these procedures. This is a key difference from the OVDP program. Again, these procedures do require the taxpayer to electronically file all FBAR (Form 114) information returns for the previous six years, and to submit all required income tax return forms (such as Form 8938), complete a Form 14654 Certification Form, and submit unpaid taxes and interest for the previous three years.

The IRS website has a substantial amount of information that goes into much more depth. The rules and procedures for submitting these voluntary disclosures are complex. For taxpayers with noncompliance issues in this area, the penalty relief measures offer substantial penalty savings. The difference between paying a 5 percent penalty and a $10,000 or 50 percent penalty (for each year of noncompliance) can result in many thousands of dollars saved.  

Christopher C. Humes, CPA, is a senior manager at Baker Tilly Virchow Krause LLP. He is a PICPA member and serves on the CPA Image Enhancement Committee.