Two recently announced IRS compliance campaigns targeting foreign bank account reporting could lead the IRS to discover more noncompliant U.S. taxpayers, who could then become subject to penalties and criminal charges.
U.S. persons are subject to tax on their worldwide income from all sources including income generated outside the United States. While there is nothing illegal or improper about U.S. persons owning offshore structures, accounts, or assets, such taxpayers must comply with the income tax and information reporting requirements associated with these offshore activities.
Offshore Private Banking Campaign
When announcing this campaign in April 2019, the IRS indicated that it is in possession of records that identify taxpayers with transactions or accounts at offshore private banks. The campaign is intended to address tax noncompliance and the information reporting associated with such accounts, which are potentially subject to reporting on FinCEN 114 (formerly Form TD F 90-22.1), Report of Foreign Bank and Financial Accounts (“FBAR”). Severe penalties can be imposed for failing to file complete and accurate FBARs.
Foreign Account Tax Compliance Act ("FATCA")
Congress enacted FATCA in 2010 to target noncompliant U.S. taxpayers using foreign accounts. Since FATCA’s enactment, the IRS has been using it extensively to combat tax evasion by U.S. persons holding accounts and other foreign assets offshore.
Under FATCA, certain U.S. taxpayers holding financial assets outside the United States must report those assets to the IRS on Form 8938, Statement of Specified Foreign Assets. There are severe penalties for failing to report such assets. This reporting requirement is in addition to the long-standing requirement to report foreign financial accounts on FBARs.
FATCA also requires certain foreign financial institutions and certain other non financial foreign entities to report directly to the IRS information about foreign assets held by their U.S. account holders or by foreign entities in which U.S. taxpayers hold a substantial ownership interest. The reporting institutions include not only banks, but also other financial institutions, such as investment entities, brokers, and certain insurance companies.
Speaking at last month’s New York University Tax Controversy Forum, Kimberly A. Schoenbacher, acting director of IRS field operations (foreign payments practice), said that the IRS will be undertaking a compliance campaign this summer targeting foreign banks that have not reported the foreign assets of their U.S. account holders. By stepping up its enforcement efforts against these institutions, the IRS will likely learn more about noncompliant U.S. account holders.
Penalties for Noncompliance
U.S. persons are potentially subject to a penalty of $10,000 for each account not reported on an FBAR. If the failure to report is willful, the penalty can be increased to the greater of $100,000 or 50% of the account balance. Criminal violators are potentially subject to fines of up to $500,000, or 10 years imprisonment, or both.
Further, U.S. persons failing to file a complete and correct Form 8938 are potentially subject to a penalty of $10,000, with a maximum additional penalty for a continuing failure to file of $50,000, and a 40% penalty on an understatement of tax attributable to non-disclosed assets. Criminal penalties may also apply, and there is no time limit restricting the IRS from auditing a tax return with a missing or incorrect Form 8938.
Procedures to Get Current with the Filing Obligation
The IRS offers several programs that allow individuals to remedy their noncompliance with reduced penalties or no penalties at all. These programs are generally not available, however, if attempts to remedy noncompliance are not made before the IRS contacts the taxpayer about such noncompliance.
Considering the potentially severe consequences associated with noncompliant reporting of foreign bank and other offshore financial assets, coupled with the IRS stepping up its enforcement efforts to uncover such noncompliance, taxpayers having unreported foreign assets would do well to investigate the various remedies available for voluntarily self correcting their noncompliance.