How to deal with Common Foreign Tax Noncompliance Mistakes

FATCA will make even common mistakes more apparent to the IRS.

Jeffrey S. Freeman, J.D., LL.M

As FATCA takes effect in 2014 the IRS will have more data available on U.S. Citizens that have offshore foreign income. It is important to review your tax history and your current filings to ensure that you have not committed a noncompliance blunder.

  1. Always report Global Income –U.S. citizens, resident aliens, and select others are required to report their global income on their U.S. income tax returns. If you have a foreign account of any amount you must check “yes” on Schedule B. You may be entitled to tax credits or exclusions for income earned abroad, but it must be reported. If you foreign assets exceed $50,000 you must additionally file Form 8938.

Failing to report your global income by not checking the foreign bank account box can potentially be considered tax evasion or fraud. In addition, you could be given a 20% negligence penalty or a 75% civil fraud penalty on the tax due for failure to report this income.

  1. File FBARs annually – If the sum of your offshore foreign bank accounts exceeds $10,000 at any point during the year you must also file a FBAR (Report of Foreign Bank and Financial Accounts). This has been a law since 1970, but enforcement is increasing and FATCA will aid in the enforcement.

Not filing an FBAR has a civil penalty for each non-willful violation. If deemed willful, the penalty is the greater of $100,000 or 50% of the account balance for each year you failed to file an FBAR. This can also be considered a criminal offense with fines up to $500,000 and up to ten years in prison.

  1. Take Advantage of IRS amnesty program – The IRS amnesty program is underway allowing you to submit up to eight amended tax returns and eight FBARs. You will be required to pay taxes, interest and a 20% penalty on your unreported income. You will also pay a penalty equal to 27.5% of the highest balance in your foreign accounts over the past eight years. Bottom line – you aren’t prosecuted.

If you were to amend tax returns and file FBARs outside of the IRS amnesty program and are caught the IRS could deal harshly with you. It is better than doing nothing, but it’s not an easy solution to a past omission. Failing to file FBARs has civil and criminal penalties that are worse than regular tax penalties.

  1. Correct the past and the present – If you start filing accurate tax returns and corresponding FBARs the IRS is bound to ask about the lack of previous records disclosing a foreign bank account. Closing an account is not the solution – As tempting as it may seem to just close your foreign account it can appear that you are concealing your previous offshore activities.

Foreign income taxation is complex and equally challenging to clean up a previous mistake. Always seek experienced professional legal advice to correct your tax noncompliance issues.

About Freeman Tax Law

Freeman Tax Law is a boutique tax law firm with national exposure equipped to handle all domestic and international tax law matters. At Freeman Tax Law, the attorneys and professional staff have vast experience with foreign tax compliance, international tax planning, and resolving tax controversies involving offshore banking matters. Freeman Tax Law helps taxpayers and foreign entities become in compliance with laws such as Foreign Account Tax Compliance Act (FATCA) and Offshore Voluntary Disclosure Program (OVDP). In addition to handling complex tax controversies, the Freeman Tax Law team has extensive expertise in assisting clients with wealth management and estate planning.

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