Source: https://www.lawrice.com/practice-areas/taxation/foreign-accounts-voluntary-compliance-fbar/
Timestamp: 2019-04-23 12:47:18+00:00

Document:
Many people have financial accounts in foreign countries. A Report of Foreign Bank and Financial Accounts (commonly known as FBAR) is a tool to help the United States government identify people who may be using foreign financial accounts to circumvent United States law. Investigators use FBARs to help identify and trace funds used for illicit purposes or to identify unreported income maintained or generated abroad. FBAR is not an income tax return and should not be filed with any income tax returns. However, certain information must be disclosed on U.S. tax returns.
Generally, a Report of Foreign Bank and Financial Accounts must be filed by a United States person by June 30 of the succeeding year. A United States person who has a financial interest in, signature or other authority over any financial accounts in a foreign country must report that relationship if the aggregate of these accounts exceeds $10,000 at any time during the calendar year.
A United States person means a citizen or resident of the U.S., or a person in and doing business in the U.S.
Financial accounts include any bank, securities, securities derivatives and other financial instruments accounts. Such accounts also include any accounts in which the assets are held in a commingled fund, and the account owner holds an equity interest in the fund, including mutual funds. Financial accounts also include any savings, demand, checking, deposit, time deposit and any other account, such as debit card and prepaid card accounts, maintained with a financial institution or other person engaged in the business of a financial institution.
A United States person has a financial interest in an account in which he or she is the owner of record or has legal title, whether the account is maintained for his or her own benefit or for the benefit of others. Moreover, a United States person has a financial interest in an account if an owner of record or holder of legal title is an agent acting on behalf of the U.S. person; is a corporation, partnership or trust which the U.S. person owns more than a 50 percent interest; or is a trust or person acting on behalf of a trust that was established by such a U.S. person and for which a trust protector has been appointed.
What Happens If I Fail To File An FBAR?
Failure to file an FBAR may subject a person to criminal charges and penalties that include a prison term of up to 10 years and penalties of up to $500,000. Moreover, a person may be subject to tax evasion charges if he or she fails to file required tax returns. A person convicted of tax evasion is subject to a prison term of up to five years and a fine of up to $250,000. Filing a false return subjects a person to a prison term of up to three years and a fine of up to $250,000.
A person may also be subject to civil penalties for failing to file an FBAR. Generally, the civil penalty for willfully failing to file an FBAR can be as high as the greater of $100,000 or 50 percent of the total balance of the foreign account. However, non-willful violations are subject to a civil penalty to more than $10,000.
Is There An Amnesty Program Under Which I Can Voluntarily Disclose My Offshore Accounts Without Penalty?
While it is too late for taxpayers to take advantage of the 2009 amnesty program, taxpayers may take advantage of a new amnesty program initiated by the Internal Revenue Service.
On February 8, 2011, the IRS announced a special voluntary disclosure initiative to bring offshore money back into the U.S. tax system while at the same time helping people with undisclosed income from hidden offshore accounts get current with their taxes. This initiative, known as the 2011 Offshore Voluntary Disclosure Initiative, is available through August 31, 2011.
Provided copies of previously filed original (and, if applicable, previously filed amended) federal income tax returns for tax years covered by the voluntary disclosure.
Provide complete and accurate amended federal income tax returns for all tax years covered by the voluntary disclosure, with applicable schedules detailing the amount and type of previously unreported income from the account or entity.
File complete and accurate original or amended offshore-related information returns and Form TD F 90-22.1 for calendar years 2003-2010.
Cooperate in the voluntary disclosure process, including providing information on offshore financial accounts, institutions and facilitators, and signing agreements to extend the period of time for assessing tax and penalties.
Pay 20 percent accuracy-related penalties under Internal Revenue Code § 6662(a) on the full amount of your underpayments of tax for all years.
Pay failure to file penalties under IRC § 6651(a)(1), if applicable.
Pay failure to pay penalties under IRC § 6651(a)(2), if applicable.
Pay in lieu of all other penalties that may apply, including FBAR and offshore-related information return penalties.
Submit full payment of all tax, interest, accuracy-related penalty and, if applicable, the failure to file and failure to pay penalties, or make good faith arrangements with the IRS to pay in full the tax, interest and penalties.
Execute a closing agreement on Final Determination Covering Specific Matters.
The 2011 OVDI includes several changes from the 2009 Offshore Voluntary Disclosure Program. The overall penalty structure for 2011 is higher, meaning that people who did not come in through the 2009 voluntary disclosure program will not be rewarded for waiting. For the 2011 OVDI, individuals must pay a penalty of 25 percent of the amount in the foreign bank accounts in the year with the highest aggregate account balance covering the 2003 to 2010 time period. Some taxpayers may be eligible for 5 or 12.5 percent penalties. Participants must also pay back-taxes and interest for up to eight years as well as paying accuracy-related and delinquency penalties. For participants with smaller offshore accounts, the IRS created a new penalty category of 12.5 percent. Participants whose offshore accounts or assets did not surpass $75,000 in any calendar year covered by the 2011 OVDI will qualify for this lower rate.
What If I Have Offshore Accounts But Don’t Participate In The 2011 OVDI?
Taxpayers who fail file a required FBAR under the 2011 OVDI (by August 31, 2011), may subject themselves to both civil and criminal penalties.
Making a voluntary disclosure by August 31, 2011, under the terms of the 2011 OVDI allows taxpayers the opportunity to calculate with a reasonable degree of certainty the total cost of resolving all offshore tax issues. Taxpayers who do not submit a voluntary disclosure run the risk of detection by the IRS and the imposition of substantial penalties, including the fraud penalty and foreign information return penalties, and an increased risk of criminal prosecution. Taxpayers who submit a voluntary disclosure by August 31, 2011, will not be recommended by the IRS to the Department of Justice for criminal prosecution.
What Other Penalties May I Be Subject To?
Failing to file Form 3520, Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts: the penalty for failing to file a return or filing an incomplete return is 35 percent of the gross reportable amount, except for returns reporting gifts, where the penalty is 5 percent of the gift per month, up to a maximum penalty of 25 percent of the gift.
Failing to file Form 3520-A, Information Return of Foreign Trust with a U.S. Owner: the penalty for failing to file the information return or filing an incomplete return is 5 percent of the gross value of trust assets determined to be owned by the U.S. person.
Failing to file Form 5471, Information Return of U.S. Persons with Respect to Certain Foreign Corporations: the penalty for failing to file a return is $10,000, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50,000 per return.
Failing to file Form 5472, Information Return of 25 percent Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business: the penalty for failing to file the information return or to keep certain records regarding reportable transactions is $10,000 with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50,000 per return.
Failing to file Form 926, Return by a U.S. Transferor of Property to a Foreign Corporation: the penalty for failing to file a return is 10 percent of the value of the property transferred, up to a maximum of $100,000 per return, with no limit if the failure to report the transfer was intentional.
Failing to file Form 8865, Return of U.S. Persons With Respect to Certain Foreign Partnerships: penalties include $10,000 for failure to file each return, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50,000 per return, and 10 percent of the value of any transferred property that is not reported, subject to a $10,000 limit.
Fraud penalties imposed under IRC §§ 6651(f) or 6663: if an underpayment of tax, or a failure to file a tax return, is due to fraud, the taxpayer is liable for penalties that, although calculated differently, essentially amount to 75 percent of the unpaid tax.
Penalty for failing to file a tax return imposed under IRC § 6651(a)(1): if a taxpayer fails to file an income tax return, a penalty of 5 percent of the balance due, plus an additional 5 percent for each month or fraction thereof during which the failure continues, may be imposed, but the penalty shall not exceed 25 percent.
Penalty for failing to pay the amount of tax shown on the return under IRC § 6651(a)(2): if a taxpayer fails to pay the amount of tax shown on the return, he or she may be liable for a penalty of .5 percent of the amount of tax sown on the return, plus an additional .5 percent for each month or fraction thereof that the amount remains unpaid, not exceeding 25 percent.
Accuracy-related penalty on underpayments imposed under IRC § 6662: depending upon which component of the accuracy-related penalty is applicable, a taxpayer may be liable for a 20 percent or 40 percent penalty.

References: § 6662
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