Penalties for noncompliant US citizens residing abroad

YOU may be subject to harsh penalties – penalties that are more severe than you expect, penalties that can even exceed balances in your accounts if you are a US citizen (or dual citizen) residing outside the US who do not report your foreign accounts. Therefore, it is critical that you learn the new rules for FBAR (Report of Foreign Bank and Financial Accounts) to determine if you should report your offshore accounts.

Background on FBARs. Each US person who has a signature, financial interest, or other authority over any foreign financial accounts, including securities and bank accounts with an aggregate value of more than $10,000 at any time during the calendar year, in a foreign country, must report in each calendar year by filing an FBAR with the Department of the Treasury on or before June 30th of the succeeding year.

Potential FBAR penalties

• Typically, the civil penalty for willfully failing to file an FBAR can be up to the greater of $100,000 or 50% of the overall balance of the foreign account at the time of the violation.

• Alternatively, non-willful violations that the IRS concludes are not due to reasonable cause are subject to a penalty of up to $10,000 per violation.

• May arise to:

• Failure to file and failure to pay penalties

• Civil penalties may also arise including the fraud penalty

• Accuracy-related penalty, and

• Other information reporting penalties.

• If the IRS determines the violation was due to reasonable cause, no penalties will be imposed.

Reasonable Cause for Failure to File FBAR:

Included are factors that weigh in favor of a determination that an FBAR violation was due to reasonable cause:

• Reliance upon a professional tax advisor who was informed of the existence of the foreign account,

• That it was for a legitimate purpose that the unreported account was established and none whatsoever, were there signs of efforts taken to deliberately conceal the reporting of income or assets, and

• No tax deficiency was found (or there was a tax deficiency but the amount was de minimis).

Following are factors that weigh against  a determination that an FBAR violation was due to reasonable cause:

• Whether the taxpayer’s education and background indicate that he should have had the knowledge of the FBAR reporting,

• Whether there was a tax deficiency in relation to the unreported foreign account, and

• Whether the taxpayer failed to disclose to the person preparing his tax return the existence of the account.

Generally, the taxpayer is granted reasonable cause relief when he/she can demonstrate to the IRS that he/she exercised ordinary business care and prudence but nevertheless failed to meet the tax burden. Included are factors that demonstrate in whether or not ordinary business care and prudence were exercised:

• Reasons provided for the taxpayer’s failure to meet the tax obligations;

• Compliance history of the taxpayer;

• Length of time between the failure of the taxpayer to meet the tax obligation and the subsequent compliance; Circumstances beyond the taxpayer’s control.

What the IRS Considers as Facts and Circumstances that determine Reasonable Cause for Failure to File FBAR:

• Whether the taxpayer has been penalized before;

• Whether the taxpayer has been previously subject to the tax;

• The taxpayer’s education;

• Level of complexity of a tax or compliance issue.

• Whether there were recent changes in the tax law that the taxpayer could not reasonably be expected to know.

In accordance with IRS Circular 230, this communication is not to be considered a “covered opinion” or other written tax advice and should not be relied upon for IRS audit, tax dispute, or any other purpose.

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Sy Al-os Accountancy Corporation provides accounting and tax services to individuals, corporations, LLCs and business entities. The Firm has a niche in defending taxpayers audited by the IRS and other governmental agencies.