The Internal Revenue Service (IRS) Offshore Disclosure Program provides individuals with undisclosed offshore accounts an opportunity to come forward and disclose their financial assets, ensuring compliance with U.S. tax laws. If you wait in the hope that the undisclosed assets will not be discovered, you will likely face severe consequences.
By voluntarily disclosing your offshore accounts, you can avoid the most costly penalties, including jail time. Whether or not you intentionally withheld your tax information will not prevent you from applying for the program, but the disclosure must be made before the IRS learns of it on its own. If the disclosure is made too late, criminal proceedings can be initiated.
Our tax attorneys can help you with a free case analysis when you call McCormick Tax Law at (888) 973-3503.
Understanding How the IRS Offshore Disclosure Program Works?
If you are a U.S. taxpayer and find yourself to be out of compliance with the IRS, the Offshore Disclosure Program could be a solution to the crisis. This option offers you a chance to voluntarily disclose your unreported income, money, assets, investments, and accounts to the IRS and get back into compliance.
The Offshore Voluntary Disclosure Program is a federal government program that provides taxpayers with an opportunity to disclose their offshore assets that were previously unreported. However, you will not want to face the disclosure process without the help of our experienced tax attorneys. The process is quite complex and has undergone changes in recent years.
To make things easier for taxpayers, the voluntary disclosure programs were combined in 2019. Since then, the IRS has been taking a more aggressive approach in recent years regarding foreign accounts compliance. The process will usually be different depending on whether your nondisclosure was deemed willful. If you qualify as non-willful, though, you might be eligible for streamlined filing.
The Difference Between Non-Willful and Willful Violations
Determining whether a violation is willful or non-willful is a complex matter. The IRS does not have a specific test to make such a determination. Instead, it considers all the facts and circumstances and then makes a decision based on the totality of the circumstances.
The analysis is subjective, and even two IRS examiners who examine the same set of facts and circumstances might reach different conclusions about a taxpayer’s willfulness or non-willfulness. For this reason, it is essential that taxpayers carefully present their case to the IRS in a clear and concise manner that accurately represents the relevant facts and circumstances.
However, a violation being classified as willful does not necessarily require a person to act with willful/purposeful intent. The term willful encompasses other acts of willfulness, such as reckless disregard and willful blindness.
A person who behaves recklessly is considered willful and can face the same consequences as those who intentionally break the law. Reckless conduct does not have a precise definition but suggests that the taxpayer was grossly negligent in understanding the requirements.
Similarly, a taxpayer who acts with willful blindness, meaning that they were unaware of their obligations, can also be deemed willful. For example, if a taxpayer had a suspicion that they should have reported their foreign accounts and assets but deliberately refrained from conducting further research or consulting with a tax expert, the U.S. government could use this as evidence of willful blindness.
When is a Disclosure Considered Voluntary?
When a taxpayer provides information that is complete, truthful, and timely to the IRS, it is considered a voluntary disclosure. You will also be required to cooperate with the IRS in determining your correct tax liability and make arrangements to pay the IRS in full. By doing so, you can avoid potential legal action and severe penalties from the IRS.
To ensure that a voluntary disclosure is considered timely, it must be submitted to the IRS before they initiate a civil examination or criminal investigation of the taxpayer. Alternatively, the voluntary disclosure must be submitted before the IRS has received information from an external source, such as an informant, another governmental agency, or the media, that indicates the taxpayer’s noncompliance and begins an investigation.
In fact, disclosure must typically be made before the IRS has initiated a civil or criminal investigation that pertains directly to the taxpayer’s liability. If the IRS has obtained information relating to the taxpayer’s liability through a criminal enforcement action, such as a search warrant or grand jury subpoena, before the voluntary disclosure is made, it will also not be considered timely.
How Do I Make an Offshore Voluntary Disclosure?
If you want to make a voluntary disclosure to the IRS, you can start by contacting the nearest IRS Criminal Investigation office. They will be able to guide you through the process and help you understand your rights and responsibilities.
Before doing so, you might want to call the IRS Voluntary Disclosure Hotline at (215) 516-4777 with any questions or concerns you have. You can also visit the IRS’s Voluntary Disclosure page online for additional information. While these sources can be helpful, we still encourage you to consult with our firm before making any decisions that cannot be undone.
Will Penalties Be Assessed if I Qualify for the IRS’s Offshore Disclosure Program?
Failing to report all your income can lead to serious consequences. In addition to owing taxes, you might be subject to various penalties. For instance, if you have unreported offshore accounts, you might face a 27.5% offshore penalty. This penalty is calculated based on the highest aggregate balance of your foreign accounts over the course of eight years.
Apart from the offshore penalty, you might also be liable for a 20% accuracy-related penalty. This penalty is imposed on the total underpayment of your taxes over the same period. The IRS might impose this penalty if they find that you made a substantial understatement of your tax liability or if you failed to disclose certain information on your tax return.
Furthermore, if you fail to pay your taxes or file your tax returns on time, you might be subject to additional penalties. These penalties might include late payment penalties, failure-to-file penalties, and interest charges.
How Can a Tax Attorney Help Disclose My Offshore Tax Information?
If you need to disclose your offshore assets, we can provide valuable support in several ways. First, we can help you determine the most appropriate offshore disclosure program after evaluating your situation and degree of non-compliance.
Perhaps most importantly, we can help you collect all the necessary financial records, account statements, and other supporting documents required for the disclosure process.
Lastly, our team can assist you in accurately completing the required forms, ensuring compliance with IRS procedures, and effectively communicating with the IRS on your behalf. By doing so, we can help you navigate the complex program and minimize the potential penalties applied.
Our Tax Attorneys Are Ready to Help You Make Your Disclosures
For a free case evaluation with our skilled tax attorneys, contact McCormick Tax Law today by calling (888) 973-3503.
IRS Form 8854 is a critical document that individuals must file when relinquishing their U.S. citizenship or long-term residency. Failure to file this form can lead to steep financial penalties and other legal consequences.
When a U.S. citizen or Permanent Legal Resident voluntarily renounces their citizenship, they will be deemed expatriates by the Internal Revenue Service (IRS). This does not let expatriates off the hook for their tax obligations. Essentially, individuals might be subject to an “exit” tax if their net worth was a certain level. However, exceptions might exist in your case that could save you thousands of dollars.
Call McCormick Tax Law at (888) 973-3503 to get your free case review with our expatriation tax attorneys.
What is IRS Form 8854 and Who is Required to File One?
Internal Revenue Service Form 8854 is a mandatory requirement for U.S. citizens and certain legal permanent residents categorized as “long-term residents.” This form needs to be filed by taxpayers while submitting their tax returns for the year they expatriated from the US.
When a taxpayer is a “covered expatriate,” exiting the U.S. can lead to certain tax implications. Net worth and net income tax value are the two primary tests for determining your responsibilities. However, many U.S. residents are unaware of the income and reporting requirements that they need to fulfill.
Moreover, the U.S. has taken a firm stand on matters related to foreign accounts compliance, which means that a person might become a covered expatriate without even realizing it. Our expatriation tax attorneys can help determine if you fall under this classification. Non-compliance can lead to severe consequences. However, taxpayers can usually rectify their situation by opting for the voluntary disclosure program, which is a safe way to get into compliance with the IRS.
Who Must File Form 8854
If you renounced your U.S. citizenship after June 16, 2008, you will be considered a covered expatriate if any of the following situations apply. Firstly, if your average annual net income tax liability for the five tax years before expatriation is greater than $178,000. Secondly, if your net worth was $2 million or more at the time of your expatriation. Lastly, if you do not certify on Form 8854 that you have fulfilled all of your federal tax obligations for the five tax years prior to your expatriation, you will be deemed a covered expatriate.
To put it simply, when certain U.S. persons relinquish their U.S. citizenship, they become subject to the U.S. exit tax as covered expatriates for tax purposes. The covered expatriate rules are applicable to U.S. citizens and Legal Permanent Residents who are long-term residents. As a result, expatriates are required by the IRS to calculate an exit tax when they leave the U.S. and submit their 1040/1040NR tax return, along with Form 8854.
Expatriating from the United States without filing the required tax forms can result in severe repercussions, including hefty fines for not reporting foreign assets (FBAR penalties), penalties for failing to comply with the Foreign Account Tax Compliance Act (FATCA), taxes on passive foreign investment companies (PFIC), loss of passport, and even imprisonment. Hence, it is crucial to comprehend the tax ramifications of expatriation and fulfill the IRS obligations to steer clear of any legal or financial complications.
How the IRS Determines the Date of Expatriation
There are four possible dates on which a citizen can be considered to have relinquished their U.S. citizenship. The first is when the individual renounces their U.S. nationality before a diplomatic or consular officer of the United States and receives approval from the U.S. Department of State through a certificate of loss of nationality.
It is also considered an act of expatriation when an individual submits a signed statement of voluntary relinquishment of U.S. nationality to the U.S. Department of State, confirming their act of expatriation.
The third is when the U.S. Department of State issues a certificate of loss of nationality to the individual.
Finally, the last way is when a U.S. court cancels the certificate of naturalization of a naturalized citizen.
When an individual who has been granted the privilege of permanent residency loses this status because of revocation or administrative or judicial determination of abandonment, they are no longer considered a lawful permanent resident.
Additionally, if a long-term resident wants to be treated as a resident of a foreign country under a tax treaty between the United States and that country and does not waive the benefits of the treaty applicable to residents of the foreign country, they will be considered to have renounced their resident status. However, the individual must notify the IRS of such treatment on Forms 8854 and 8833.
What Are the Penalties for Failing to File IRS Form 8854?
Failing to file Form 8854 or including incorrect information on the form can result in a penalty of $10,000 for the tax year in question unless it can be demonstrated that the failure was because of reasonable cause and not willful neglect. This is why it is vital to ensure that all the required information is included on the form and accurately reported to avoid this steep financial penalty and potential criminal liability.
Who is Exempt from Filing IRS Form 8854?
In most instances, individuals who hold dual citizenship or are minors at the time of expatriation will not be classified as covered expatriates. However, if they do not submit Form 8854 and confirm that they have met all their federal tax obligations for the five tax years leading up to their expatriation, they will still be deemed covered expatriates.
If you fulfill the following two conditions, you might be eligible for the exception. Firstly, if you were born a U.S. citizen and also a citizen of another country, you still hold citizenship and pay taxes in that other country as of the expatriation date. Secondly, you must also have been a resident of the United States for a maximum of 10 years within the 15-tax-year period ending with the tax year during which the expatriation took place.
To qualify for the exception described above, minors must meet two specific requirements. Firstly, they must have expatriated before turning 18 years old. Additionally, the minor must have been a resident of the United States for no more than ten tax years prior to the expatriation. Meeting these two criteria would allow you to qualify for the exception.
Our Expatriation Tax Attorneys Can Help You Understand Your IRS Form 8854 Filing Requirements
For a free evaluation of your filing requirements, contact our expatriation tax lawyers at McCormick Tax Law today at (888) 973-3503.
As an individual with financial interests abroad, you likely need to file a Report of Foreign Bank and Financial Accounts (FBAR). However, managing and filing FBAR can be complex and time-consuming.
Fortunately, taxpayers are allowed to assign the power of attorney to other individuals to handle their FBAR filing. While this can relieve a great deal of stress, assigning the power of attorney should not be done lightly. It gives an individual the power to act on your behalf but will not necessarily keep you from facing penalties if that power is misplaced. Thus, you should understand fully what assigning the power of attorney can do in your case.
For help determining whether assigning the power of attorney is right for you, Contact our FBAR tax attorneys at McCormick Tax Law today at (215) 630-0861.
Can the Power of Attorney for the FBAR Filing Be Assigned to Another Person?
Individuals who have a financial interest in or signature authority over foreign financial accounts whose aggregate value exceeds $10,000 at any time during the calendar year are required to file FBAR, an annual report with the Financial Crimes Enforcement Network (FinCEN). FBAR’s primary objective is to identify and prevent illicit financial activities, including money laundering and tax evasion. While filing the FBAR is an individual’s responsibility, the power of attorney over the filing can be assigned to another person.
Many people find the process of filing FBAR overwhelming, especially busy professionals who might not have the time to handle it themselves. As a result, assigning power of attorney for FBAR filing might seem like an attractive option. Despite the fact that FBAR regulations do not contain specific provisions on power of attorney for filing purposes, it is generally allowed under broader principles of the power of attorney law. Therefore, it is possible for individuals to appoint someone else to handle their FBAR filing on their behalf.
To assign power of attorney for FBAR filing, certain legal requirements must be met. These requirements vary depending on the jurisdiction and the specific circumstances of the case. Generally, granting power of attorney requires a written agreement signed by the grantor and the designated attorney-in-fact. The agreement should clearly outline the scope of authority granted and the duration of the power of attorney.
In the context of FBAR filing, the designated person would typically be authorized to access and review the necessary financial information and prepare and file the FBAR report on behalf of the grantor. Our international business tax attorneys can review your case to determine if assigning the power of attorney is in the best interest of your case. Whoever the assignee turns out to be, it is crucial that the designated person acts in the best interests of the grantor and complies with all applicable laws and regulations.
Why Would Someone Assign the Power of Attorney for an FBAR Filing?
If you have a complex financial situation or find it challenging to manage your own affairs, assigning power of attorney for FBAR filing can be highly advantageous. By doing so, you can delegate the responsibility of filing FBAR to someone you trust, who can take care of the process on your behalf. This can help to simplify the process, reduce the likelihood of errors, and ensure that your FBAR is filed accurately and on time. The following are a few ways that assigning power of attorney can benefit your case:
For those who lead busy lives and have limited time, it can be advantageous to grant power of attorney for FBAR filing. By entrusting this task to a reliable individual, they can devote their attention to their primary activities while guaranteeing adherence to FBAR regulations. This approach allows them to manage their time more effectively and ensures that the necessary compliance measures are taken care of.
FBAR Filing for Spouses and Family Members
When it comes to filing FBAR reports, couples might find it beneficial to opt for joint filing. In such cases, granting power of attorney to one spouse enables them to act on behalf of both, simplifying the filing process and minimizing the chances of any inconsistencies. This approach can prove to be a time-efficient and hassle-free method for couples who prefer to manage their FBAR reporting together.
Family members could also assign the power of attorney to other family members if that situation would be more convenient. For example, a resident of the United States has power of attorney for her elderly parents’ accounts in Canada. Even if she has never exercised the power of attorney, she is still required to file an FBAR if the power of attorney allows her to sign on behalf of the financial accounts. Whether or not the assignee has ever used her authority is irrelevant to the requirement of filing an FBAR. Once the power of attorney has been assigned, it is the responsibility of the assignee to ensure the FBAR is properly filed.
Are There Risks to Assigning the Power of Attorney for an FBAR Filing?
Assigning power of attorney for FBAR filing can be a complex and risky process, as it involves granting someone else the authority to act on your behalf in financial matters. This arrangement can potentially expose you to various risks, such as abuse of authority, breach of confidentiality, or non-compliance with legal reporting requirements. Penalties for failing to file the FBAR or filing late are not to be taken lightly, so the power of attorney should only be granted to those you have the utmost trust in.
To mitigate these risks, it is essential to carefully select a trustworthy and competent individual to act as your attorney-in-fact and to establish clear expectations and limitations within the power of attorney agreement. This might involve specifying the scope of the attorney’s authority, setting reporting deadlines, and providing for appropriate safeguards to protect your rights and interests.
Furthermore, seeking legal advice from a qualified attorney who specializes in tax and power of attorney law can help you navigate the legal complexities and ensure that your rights are fully protected throughout the process. With careful planning and diligent execution, assigning a power of attorney for FBAR filing can be a safe and effective way to manage your financial affairs.
What Are the Penalties for Failing to File the FBAR?
It is important to note that the IRS cautions that failure to submit an FBAR in a timely and accurate manner might lead to penalties, fines, and even criminal consequences for taxpayers. If a violation is determined to be unintentional, the penalty for each occurrence is generally capped at $10,000. It should be noted that this fine can be imposed for each separate violation.
In the event that the violation is found to be deliberate, the penalty will rise to either $100,000 or 50% of the account balance at the time of the violation, whichever is greater. Furthermore, if the IRS determines that an individual has intentionally committed a violation, they might face additional criminal sanctions.
Our FBAR Tax Attorneys Can Help You Plan Your Filing
For your free case evaluation, call our international tax lawyers today at McCormick Tax Law at (215) 630-0861.
The FBAR filing requirement is an important obligation for US taxpayers with foreign accounts. failure to comply with the filing times for the FBAR can result in serious financial consequences.
It is crucial for U.S. taxpayers who possess foreign financial accounts to comply with FBAR filing requirements. If you fail to submit an FBAR, you could face severe consequences, including substantial financial penalties, potential imprisonment, and loss of account funds. Luckily, there are numerous alternatives available to rectify non-compliance. These programs allow taxpayers to fix their errors and avoid the harsh consequences of non-compliance.
To receive your free case review with our FBAR tax lawyers, contact McCormick Tax Law by calling (215) 630-0861.
What Are the Penalties for Failing to File the FBAR on Time?
Not filing the Report of Foreign Bank and Financial Accounts (FBAR) can lead to different types of penalties. FBAR violations are classified into two categories: willful and non-willful. Depending on the case, a warning letter might be the only penalty for a violation. On the other hand, in some cases, perpetrators can be penalized with a 50% penalty on their maximum account value per year.
Civil penalties are usually imposed on those who file their FBARs late or not at all. To determine the penalties you are facing and how to avoid them, working with our international tax attorneys is highly recommended. Criminal penalties are uncommon but might be imposed in cases of willful failure to file an FBAR. These penalties are typically applied in cases where taxpayers are already being investigated for other crimes such as money laundering, tax evasion, structuring, and smurfing.
Penalties for Non-Willfully Failing to File the FBAR
Non-willful penalties are more commonly imposed, and the assessment and enforcement of penalties for non-willful violations can vary. If you commit a non-willful violation, you might face several penalties, with the lightest being a warning letter from the government. You could also be assessed a $10,000 fine that covers all violations for all years, a $10,000 fine per year for the violations committed, or a $10,000 fine per violation per year.
However, the definition of non-willful is not precisely defined, and the IRS examines the totality of the circumstances when determining whether a violation was non-willful. If you have been charged with a non-willful FBAR violation, the facts of your case will need to be reviewed to determine if the government will agree that your late filing was unintentional.
The year 2023 witnessed an important development in tax law as the Supreme Court agreed to address a crucial question regarding the non-willful penalty for FBAR violations. Specifically, the court was tasked with determining whether the penalty should be imposed on a per form or per account basis.
This decision would have significant implications for individuals and businesses with multiple foreign financial accounts, as the per account basis would result in higher penalties compared to the per form basis. Those who stood to benefit from the government collecting more substantial proceeds were in favor of the per account basis, while those representing the interest of individuals and businesses with foreign accounts argued for penalization on a per form basis. It will be important to review your case to see how the Supreme Court’s future ruling will affect your case.
Penalties for Willfully Failing to File the FBAR
FBAR penalties can be imposed if a taxpayer fails to comply with their FBAR obligations. When the Internal Revenue Service (IRS) determines that the violation was willful, the penalties can be more severe. Interestingly, the government does not have to prove that the mistake was made intentionally to determine that it was willful. A violation can be considered willful if the perpetrator shows a reckless disregard for their FBAR filing requirements.
Even if the perpetrator did not have actual knowledge of their FBAR violation, they might still be subject to a willful penalty. For example, foreign financial account holders who were willfully blind to their mistakes might receive such penalties. Sadly, there is no clear test to determine if someone’s violation was willful.
In general, it is best to avoid FBAR violations altogether. If you are unsure about your FBAR requirements, our team is here to help. We can assist you in avoiding mistakes that could result in the assignment of FBAR penalties.
It is crucial to report any foreign accounts holding substantial funds to avoid harsh penalties. Failure to do so might result in the IRS pursuing criminal charges against you. If you’re found guilty of intentionally not filing FBAR, you could face fines of up to $250,000 and imprisonment for up to 5 years in a federal prison.
Are There Amnesty Programs for Failing to File the FBAR on Time?
In case you filed the FBAR late or you think there was an error when you filed it, there are several FBAR amnesty programs provided by the IRS that you might be able to use. However, the programs available to you will vary based on the reason for not complying. In general, this will depend on whether the mistake was made intentionally or was non-willful.
Voluntary Disclosure Program
The aim of the Voluntary Disclosure Program (VDP) is to provide support for taxpayers who have knowingly failed to comply with tax laws. By submitting a comprehensive and timely VDP, the taxpayer’s circumstances can be assessed by the IRS, and they might determine appropriate penalties. In some instances, this can prevent the filing of criminal charges against the taxpayer. This disclosure option is typically the best choice for taxpayers who cannot declare their non-willfulness under penalty of perjury.
Streamlined Domestic Offshore Program
The Streamlined Domestic Offshore Procedures (SDOP) were created by the IRS to help taxpayers who have undisclosed foreign income, assets, accounts, and investments become compliant with IRS regulations. This program is specifically designed for individuals who are not considered foreign residents, filed their original tax returns on time, and were not willful in their non-compliance.
SDOP provides eligible taxpayers with an option to pay a 5% Title 26 Miscellaneous Offshore Penalty instead of facing other FBAR penalties. However, proving reasonable cause can be helpful for both U.S. and foreign residents, as it can help them avoid the 5% penalty imposed by SDOP. This is especially useful for individuals who do not qualify for the delinquency programs.
Reasonable is determined by the IRS, which reviews the evidence to determine whether a person has willfully violated the FBAR filing requirements. Compliant individuals have the possibility of having all penalties on their tax and assets accounts waived in full by participating in the SDOP program.
Streamlined Foreign Offshore Program
Taxpayers also might have the option to participate in the Streamlined Foreign Offshore Program (SFOP) offered by the IRS. This program allows certain individuals to file amended or original tax returns for up to three years and submit an FBAR FinCEN Form 114 for up to six years.
To be eligible, taxpayers must certify that they were not willful in their actions and must not currently be under an IRS audit under penalty of perjury. In addition to meeting eligibility criteria, participants in SFOP must file the necessary tax documents and reporting forms and pay all mandatory taxes and penalties.
Our FBAR Tax Attorneys Are Here to Help You
For a free assessment of your case with our expatriation tax attorneys, call McCormick Tax Law at (215) 630-0861 today.
The Foreign Bank and Financial Accounts (FBAR) filing requirement is a crucial obligation for U.S. taxpayers with foreign financial accounts. However, failure to comply with this requirement can have severe consequences.
As a U.S. taxpayer with foreign financial accounts, it is essential to comply with the FBAR filing requirement. Failure to submit an FBAR can result in severe consequences, such as hefty financial penalties, imprisonment, and potential loss of account funds. Fortunately, there are various options available to rectify non-compliance, such as FBAR disclosure, voluntary disclosure programs, streamlined filing procedures, or delinquent submission procedures. These programs enable taxpayers to correct their mistakes and avoid the severe repercussions of non-compliance.
For a free case assessment with our FBAR tax attorneys, call McCormick Tax Law today at (215) 630-0861.
What Can Happen if You Do Not File a Foreign Bank and Financial Account Report (FBAR)?
Failing to report foreign or offshore accounts has become a priority for the United States and IRS. As a result, audits of the FBAR have increased significantly. To avoid committing FBAR fraud, it is important to accurately report qualifying accounts and abstain from intentionally misrepresenting financial interests. If you are unsure whether a violation has occurred, our experienced FBAR tax lawyers can provide guidance on how to address the situation. It is crucial to note that concealing this information can result in severe penalties that can have a life-changing impact.
American taxpayers who hold funds or assets in offshore bank or financial accounts must report these accounts through the FBAR if the combined value exceeds $10,000 at any point during the previous year. Failure to comply with this requirement might result in severe penalties imposed by the IRS if discovered.
Civil penalties for willful violation of this rule can include a penalty equal to the greater of $100,000 or 50% of the aggregate balance of accounts reportable on an FBAR, as specified in 31 U.S.C. § 5321(a)(5)(C). Furthermore, if the matter is referred to the IRS criminal investigation unit, failure to file FBAR might result in criminal penalties, including prison sentences of up to five years.
Who is Required to File an FBAR?
As per the guidelines issued by the Financial Crimes Enforcement Network (FinCEN), individuals who are American citizens or residents and have financial interests or signature authority over foreign financial accounts are obligated to file a Report of Foreign Bank and Financial Accounts (FBAR). In some scenarios, even limited liability corporations and trusts that are formed in the United States might be required to file an FBAT.
The FBAR is mandatory if the total value of the foreign financial account exceeds $10,000 in a calendar year. Foreign accounts might include checking accounts, savings accounts, securities accounts, mutual funds, cash annuities, and other foreign accounts from a financial institution.
It is advisable for taxpayers with even minimal foreign assets to carefully review their FBAR filing obligations. It is essential to note that filing a tax return is distinct from submitting an FBAR filing.
Therefore, your FBAR Form 114 needs to be filed separately and directly with FinCEN. As FBAR regulations can change annually, individuals with foreign accounts should stay alert and keep themselves updated with the latest FBAR rules to ensure compliance.
If you fail to file an FBAR or make mistakes on your filing, it can have serious consequences, even if the mistakes were unintentional. However, several programs are available to help individuals come into compliance with FBAR regulations, depending on their circumstances.
How Can I Get Back into Compliance with My FBAR Reporting Requirements?
If you have failed to file an FBAR or if you think that you have made an error while filing, then you might be eligible to take advantage of various FBAR amnesty programs that are provided by the IRS. However, the availability of these programs will depend on the reason behind your non-compliance. In most cases, it will depend on whether the mistake was made intentionally or unintentionally.
Voluntary Disclosure Program
Assisting willful taxpayers to comply with tax laws is the primary objective of the Voluntary Disclosure Program (VDP). By submitting a comprehensive and timely VDP, taxpayers’ circumstances can be assessed by the IRS, and appropriate penalties can be determined. This can also help prevent criminal charges from being filed in certain cases. When filers are unable to certify non-willfulness under penalty of perjury, this disclosure option is typically the most viable choice.
Streamlined Domestic Offshore Program
The Streamlined Domestic Offshore Procedures (SDOP) were created by the IRS to help taxpayers who are not foreign residents, didn’t intentionally break the law, and filed their taxes on time. The program aims to help people who have undisclosed foreign assets, accounts, income, and investments comply with IRS regulations.
SDOP offers qualifying taxpayers the option to pay a 5% Title 26 Miscellaneous Offshore Penalty instead of other FBAR penalties. However, if a person can prove they had a reasonable cause for their non-compliance, they might avoid the 5% penalty imposed by SDOP. This is especially useful for those who don’t qualify for delinquency programs. Reasonable causes are determined by the IRS, finding no evidence of willful violation of FBAR filing requirements.
By participating in the SDOP program, compliant taxpayers might be able to have all penalties on their tax and asset accounts waived in full.
Streamlined Foreign Offshore Program
Taxpayers can take advantage of the Streamlined Foreign Offshore Program (SFOP) provided by the IRS. This program allows certain individuals to file amended or original tax returns for up to three years and submit an FBAR FinCEN Form 114 for up to six years. To qualify, taxpayers must certify under penalties of perjury that their actions were not willful and must not be under an IRS audit. Those who meet the eligibility criteria for SFOP must also file all the necessary tax documents and reporting forms and pay all the mandatory taxes and penalties.
Applying for the Voluntary Disclosure Program and SFOP requires separate submissions. If an individual is turned down for Streamlined Procedures, they will not be able to reapply for VDP. Nevertheless, foreign citizens who did not act deliberately might be able to avoid many penalties related to their offshore activities by using these procedures.
Delinquent FBAR Program
The Delinquent FBAR Submission Procedures (DFSP) provide a less formal option for U.S. residents and taxpayers who did not file their FBARs by mistake. This program is only applicable if the issue is related to the non-filing of FBAR, and there is no need to make changes to tax returns. Moreover, individuals who are not being investigated by the IRS can leverage this opportunity. Even if the IRS has not yet contacted you regarding FBAR delinquency, you can still use this procedure.
Our FBAR Tax Attorneys Are Here to Help
If you would like a free case evaluation with our international tax attorneys, contact McCormick Tax Law at (215) 630-0861.
Disclosing foreign pension plans on IRS information reporting forms is one of the most complex tasks related to U.S. tax and reporting requirements. Most importantly, foreign pensions must be reported on multiple information reporting forms required by the IRS.
The reporting requirements placed on you will depend on what type of pension plan you have. Because foreign pensions are generally made up of different types of contributions, knowing which forms to file can be difficult. Further, your employer might also be required to report the pension plan to the IRS. Having a seasoned tax attorney on your side can help ensure that you report your pension plan accurately.
For a free review of your case, speak with our foreign pension tax attorneys at McCormick Tax Law today by calling us at (888) 973-3503.
What Are the Reporting Requirements for Foreign Pension Taxes?
Reporting foreign pensions on your U.S. tax return can be complex due to additional requirements beyond reporting employer contributions and pension income. Fortunately, our foreign pension tax attorneys have the knowledge to ensure you meet your reporting requirements. Depending on your specific situation, you might need to use specific forms to report your foreign pension income.
If you engage in any dealings with a foreign trust, it is mandatory for you to file Form 3520. This includes pensions and retirement plans, which are commonly categorized as trusts.
If you have a foreign pension, the company managing it needs to file Form 3520-A. However, if they fail to do so, it becomes your responsibility to file this form. It is a legal requirement, and failure to comply can result in penalties.
If you are subject to the Passive Foreign Investment Company (PFIC) rules, it is mandatory to file Form 8621. Many U.S. individuals who own foreign mutual funds and equity funds might need to fill out Form 8621 for their PFIC. This is a common requirement, as foreign pension plans often include different types of investment funds.
If you possess foreign financial assets, including foreign pensions, and meet the filing threshold, you are required to report them using Form 8938. This form is necessary for the disclosure of all such assets.
Do Foreign Pensions Have to Be Reported on the FBAR?
If you are an American and have $10,000 or more deposited in a non-U.S. financial account, you are required to file FinCEN Form 114, also known as a Foreign Bank Account Report (FBAR). The FBAR was created to prevent tax evasion by making it difficult for U.S. citizens to conceal money in offshore accounts.
According to the FBAR instructions, you must report all financial accounts. In most cases, pensions are considered financial accounts. However, the requirements will vary depending on whether the foreign pension plan is a defined benefit plan or a defined contribution plan.
Defined Benefit Plans
A defined benefit plan is a retirement or death benefit plan funded by an employer or government, which provides a fixed benefit to the beneficiary. The plan participants do not have ownership rights and cannot direct investments or withdraw funds before retirement. Additionally, it might be difficult to determine the current value of the plan until retirement.
Reporting defined benefit plans on FBAR might not be necessary, according to some financial experts. However, it is safer to report it using a reasonable estimate, especially if the plan provides for a residual cash benefit payable to the beneficiaries in case of the participant’s death before retirement.
In such cases, the amount of the residual benefit might be used as the balance to report on FBAR. If you are currently receiving benefits from this plan, you can report the total annual payments as the FBAR balance.
Defined Contribution Plans
Employers and employees fund defined contribution plans, and employees control the investments within the plan. These plans always have a clear value or balance and must be reported on the FBAR.
In Switzerland and some other countries, a three-pillar retirement scheme is implemented. The first pillar is a welfare program that provides benefits for old age and disability. These plans do not require FBAR reporting. The second pillar is an employer-funded pension plan, which must be reported on the FBAR. The third pillar is a private retirement plan that must also be reported on the FBAR.
Though some foreign governments offer retirement plans similar to social security that do not require FBAR reporting, some foreign retirement plans combine social security aspects with a foreign pension plan, as well as bank and financial accounts. These plans are usually mandatory, government-run funds with contributions from both the employer and employee. Despite their similarities with social security-type programs, these types of foreign pension plans require FBAR reporting.
How Are Foreign Pensions Taxed?
Foreign pension plans are subject to U.S. taxation. For U.S. tax purposes, a foreign pension can be divided into three parts: your contributions, your employer’s contribution, and the pension’s investment income. Each of these three parts might be taxed immediately or later, depending on various factors, including the pension’s terms and conditions and any applicable tax treaties.
When you receive your pension, a portion of it might be taxed, and the remaining portion might not be taxed. As a general rule, whatever is taxed now by the U.S. will not be taxed later, and whatever is not taxed now by the U.S. will be taxed later. Thus, each part of your pension will be taxed at some point, whether it is all now, all later, or a portion now and the rest later.
Foreign Pension Contributions Tax
Contributions made by employees to foreign pensions are not considered as reducing their taxable U.S. income since such pensions are not qualified plans. Additionally, contributions made by employers to foreign pension funds are viewed as increasing the taxable income of the employee.
Foreign Pension Withdrawals Tax
If your contributions to a foreign pension were not deducted from your tax returns, your withdrawals from it will not be taxed. However, if your employer’s contributions to your pension plan were included as taxable income on your tax return, and all annual investment income was also included as taxable income on your tax returns, then your withdrawals will be taxed.
It is crucial to maintain detailed records of what was and was not included as taxable income on your tax returns since withdrawals from a foreign pension might not occur for many years or even decades. Failure to keep good records could result in the IRS treating all pension distributions as taxable income.
Annual Foreign Pension Investment Income Tax
Qualified pensions provide the benefit of tax-free income accrual. However, foreign pensions are considered as the participant’s income and, therefore, subject to annual taxes. This could be detrimental in situations where the foreign plan fund invests in foreign mutual funds or exchange-traded funds, which are classified as passive foreign investment companies or PFICs by the IRS.
Our Foreign Pension Tax Attorneys Can Help
Contact McCormick Tax Law today at (888) 973-3503 to receive a free case evaluation with our international tax attorneys.
If you happen to have family members who are nationals of a foreign nation, there is a possibility that you might receive an inheritance from them at some point during your lifetime. You might question whether or not you will be required to pay taxes on an inheritance that you receive from a foreign relative.
If you receive an inheritance from relatives outside the United States, you do not have to pay taxes on it in most cases. The responsibility of paying the tax lies on the person who provided the inheritance. However, it is mandatory to report the gift or inheritance to the IRS if the amount you receive is above a certain threshold.
For your free case evaluation, call our international inheritance tax attorneys at McCormick Tax Law at (888) 973-3503.
Is There a Tax on International Inheritances?
Inheriting assets from a non-U.S. citizen living abroad usually does not entail any tax payments. However, you might need to inform the IRS of the inheritance and pay a foreign inheritance tax if the assets were acquired overseas.
If a non-U.S. citizen leaves an inheritance to a U.S. citizen or resident alien, the IRS generally does not impose any taxes on either the recipient or the deceased’s estate. This holds true unless the assets left behind are considered “U.S. situs.” U.S. situs assets are tangible and real properties located within the United States, usually real estate. For instance, if a non-US person bequeaths a house in California to a US citizen, that house is a US situs asset, and it is subject to a tax of about 40% of its value.
However, if any assets do not qualify as U.S. situs, no federal inheritance tax applies. But you might need to pay state taxes on those assets, depending on your circumstances and the state you reside in. Our international tax fraud attorneys can help you determine what is owed from your gift if anything. Keep in mind that this applies solely to any foreign inheritance tax owed. While taxes might not be levied, the IRS does require you to report an international inheritance in certain cases.
Do I Have to Report an International Inheritance to the IRS?
Even if you are not liable for foreign inheritance taxes, it is important to note that you might still need to report the inheritance. In the event that you receive a gift or inheritance with a value greater than $100,000 from a non-US individual or their estate, you are required to file IRS Form 3520: Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts. This must be done simultaneously with your individual income tax return, which, for most taxpayers, falls on April 18th of each year.
This $100,000 threshold can include multiple sums received within a single year. For instance, if you receive a gift with a value of $30,000 from a non-US individual and, during the same year, a separate non-US individual leaves you an inheritance of $80,000, then you would need to report both amounts through Form 3520 since the total amount of $110,000 exceeds the $100,000 threshold.
The good news is that Form 3520 is an informational return rather than a tax return. You are simply required to report the gift or inheritance and are not required to pay taxes on it. However, failure to file Form 3520 accurately or on time might result in a fine of up to 35% of the gross value of the gift, inheritance, or both.
Can an International Inheritance Be Placed in a Trust?
If you have received an inheritance and decided to store the money in one or more foreign bank accounts, it is important to note that if the total amount of money in those accounts exceeds $10,000, you will need to file a Report of Foreign Bank and Financial Accounts (FBAR) using FinCEN Form 114.
Like the reporting requirement above, this is simply an informational return that does not create a tax liability. You also do not have to file this form along with your individual income tax return. Instead, the form must be filed electronically through the FinCEN BSA E-Filing System.
The deadline for filing this form is April 18 of each year. However, if you miss the deadline, it will automatically extend to October 16 without filing a request for an extension.
Are There Penalties for Not Reporting an International Inheritance to the IRS?
Failing to file an information return for an international inheritance on time or providing incomplete or incorrect information on the form can have serious consequences. The IRS can determine the income tax implications of receiving a foreign gift or bequest.
Additionally, you might be subjected to a penalty of up to five percent of the value of the inheritance for every month in which it goes unreported. However, the maximum penalty cannot exceed 25 percent of the gift. It is crucial to ensure that all required information is provided accurately and on time to avoid these consequences.
What Should I Do if I Failed to Report an International Inheritance?
If an individual fails to report their taxes without intention, they can use Streamlined Procedures to successfully submit their taxes. However, if they intentionally fail to report, they must use the IRS Voluntary Disclosure Program. If a taxpayer who intentionally fails to report submits a false narrative through Streamlined Procedures and is caught, they might face significant fines and penalties.
Taxpayers who use the streamlined filing procedures have three main obligations. Firstly, they must file their original or amended tax returns. Secondly, they should file all necessary informational returns and reporting forms, such as FBAR and FATCA Form 8938. Lastly, they must pay all the taxes due along with any penalties. Under the IRS Streamlined Procedures, taxpayers can file three years of amended or original tax returns and submit international information returns, such as the FBAR.
Voluntary Disclosure Program
Voluntary disclosure is a truthful, prompt, and comprehensive act of sharing your tax information with the IRS through designated channels. It involves working with the IRS to determine your accurate tax liability and making sincere efforts to pay the full amount of tax, interest, and any relevant penalties you owe.
To ensure timely disclosure, it is important to provide the necessary information to the IRS before they begin a civil examination or criminal investigation. The information should be given directly to the IRS by you and not by a third party, such as an informant or another governmental agency. If the IRS receives information related to your noncompliance from a criminal enforcement action, such as a search warrant or grand jury subpoena, it is also considered timely disclosure.
Our International Inheritance Tax Attorneys Can Help
For a free review of your case with our international inheritance tax lawyers, call McCormick Tax Law today at (888) 973-3503.