Anthony J. Tuths, JD, LLM
New York, NY
Recently, you may have read news headlines about certain “bad” people who hide money in offshore accounts and don’t report the income to the IRS. Some of these headlines involve serious cases of tax evasion with criminal elements. However, many of the recent cases involve something more benign, but nonetheless worthy of huge monetary penalties, known as the Foreign Bank and Financial Accounts Report (FBAR).
Generally speaking, U.S. citizens and residents are required to report all foreign financial accounts on a special form: Form TD F 90-22.1. The FBAR process and its rules are controlled by the Financial Crimes Enforcement Network (FinCEN). The FinCEN does a great job of ferreting out non-compliance; this is important because the cost of non-compliance can be huge! The starting monetary penalty (there are possible criminal penalties as well) is 50% of the highest balance in the account. This penalty is in addition to all unpaid taxes, interest and tax penalties.
Compliance with FBAR is not intuitive. You need to disclose accounts regardless of whether you earn any money!! Also, you need to disclose all accounts you have signature authority over, even if you don’t actually own the accounts. Part of the issue is that FBAR does not serve ordinary IRS function of, “did you correctly report all your income and pay the appropriate level of tax?” Rather, FBAR is a pure penalty scheme aimed at forcing full disclosure and transparency of global money movements with the hope of improving tax collections.
For those working in the financial world, it can be easy to overlook a non-U.S. account that you have some control over or maintain small economic interest. Moreover, the rules apply to any non-U.S. account: Not just the ones you read about in the Cayman Islands. For example, many finance professionals have a securities or bank account in London – FBAR wants that information also. Even if you are reporting all the income from the account on your federal tax return; you still must disclose the account on the FBAR form or you will be subject to the penalties.
If you’ve had a foreign securities, bank account, or trust for several years and failed to report it, all is not lost. There is a process for coming clean. The Offshore Voluntary Disclosure Program (OVDI) is a formal process of disclosure, but the soul cleansing it offers is not free of charge. OVDI forces you to pay all back taxes, interest and penalties plus an FBAR penalty as high as 27.5% of the highest balance in the offshore accounts.
It is indeed uncomfortable and expensive to come clean through OVDI. However, failure to do so will, in time, cause you to become the next big headline. Do not get caught up with the wrong crowd and become a headline. The partners at WithumSmith+Brown, PC are experienced in FBAR reporting and compliance and can help you navigate the rules (and stay out of the headlines).