Many U.S. taxpayers – including U.S. citizens residing abroad – frequently find that they are out of compliance with the complex laws and regulations pertaining to the U.S. income tax and foreign financial account reporting requirements administered by IRS. This is particularly true with the reporting requirements mandated by the Bank Secrecy Act (“BSA”) and more recently, the Foreign Account Tax Compliance Act (“FATCA”). A recent article in Forbes provides a good high-level overview of what is at stake in this regard. See “FBAR, FATCA Filings Top 1 Million As IRS Increases Scrutiny On Foreign Accounts, March 15, 2016, available at http://goo.gl/IofNYq.
Depending on the facts and circumstances, the consequences of noncompliance for U.S. taxpayers who fail to report foreign financial accounts and/or have unreported foreign-source income can be staggering. For example, a U.S. taxpayer who fails to file a Report of Foreign Bank and Financial Accounts (“FBAR”) as required under the BSA is potentially subject to civil penalties ranging from $10,000 (per year, per account) for non-willful violations, to as much as $100,000 or 50% of the account value (per year, per account) for willful violations. These penalties are in addition to any tax, interest and penalties due on unreported income from such accounts. Moreover, willful violations of FBAR and FATCA are potentially subject to criminal penalties.
Fortunately, there are several options for minimizing exposure to the aforementioned penalties that may be available to taxpayers seeking to voluntarily comply. These options range from voluntarily filing delinquent FBARs to participating in the IRS’s Offshore Voluntary Disclosure Program (“OVDP”). Depending on the circumstances, such voluntary participation can substantially reduce the taxpayer’s exposure to penalties and interest for prior noncompliance. However, in order to take advantage of OVDP or other similar voluntary disclosure programs, it is imperative to do so prior to being contacted by the IRS – once the IRS has notified a taxpayer of noncompliance, a taxpayer can no longer avail him or herself of the benefits of voluntary disclosure.