Many people are surprised to learn that they actually do have foreign accounts to report and should have been reporting them for some time. The required reporting form is the FinCEN 114, Report of Foreign Bank and Financial Accounts, commonly referred to as the FBAR form. The good news is there are ways to get back into compliance with the law and the IRS.
One of the ways people consider when they first realize they have a problem is the “Quiet Disclosure” method. You’ve never heard of this? That’s because it really isn’t an acceptable IRS procedure. People think that if they begin filing returns with all the proper disclosures and possibly amend some past returns (but not through an IRS disclosure program), that the IRS won’t notice—but it doesn’t work that way.
The IRS is looking for returns like this and will check the information on the current return, match it with prior year returns, and realize there is a concern. The major problem with this route is that it offers no protection against penalties for not meeting the filing requirements for prior years. Instead, taxpayers should consider one of the voluntary disclosure programs offered by the IRS to get back into compliance. One such program is the Delinquent FBAR Submission Procedures, which is available to taxpayers who have been reporting the income from their foreign accounts on their U.S. tax returns but who failed to file the FBAR forms.
Here is an example of a situation we recently encountered: Our client had multiple accounts at banks in a foreign country where he had lived prior to becoming a permanent U.S. resident. The accounts all held less than $10,000 each but together they exceeded $10,000, the filing requirement threshold for the FBAR form. Because he had been paying U.S. taxes on the interest each year, and no single account was more than $10,000, he thought he was satisfying his reporting requirements. When he moved to the Ithaca area and came to us to prepare his current year returns, we realized he had been missing his FBAR reporting requirements for several prior years. We prepared the missing year’s FBARs, submitted them through the Delinquent FBAR Submission Procedures program with the proper documentation, and now he is back in compliance.
Voluntary disclosure is the best option. Under the Delinquent FBAR Submission Procedures, the IRS will not impose a penalty for the failure to file the delinquent FBARs if you properly reported the income on your U.S. tax returns, paid all tax on the income from your foreign financial accounts, and have not previously been contacted regarding an income tax examination for delinquent returns.
Sciarabba Walker has helped taxpayers participate in the various IRS voluntary disclosure programs. If you have questions or find yourself in need of these types of services, please call to schedule an appointment.
Disclaimer: The information in this blog post is provided for general informational purposes only and is not intended to substitute for accounting, tax, or financial advice from a professional accountant. While we use reasonable efforts to furnish accurate and up-to-date information, we do not warrant that any information contained in or made available through this blog post is current or error free. No part of this communication is intended to be used for the purpose of avoiding penalties under U.S. federal tax law.