Will Your Offshore Bank or Cryptocurrency Exchange Turn You In to the IRS?

By of MillarLaw A Professional Corporation On Sunday, November 19, 2017

Well the results of the Foreign Account tax Compliance Act (“FATCA”) are coming in and the IRS will be stepping up audit of “holder” of unreported account. The exam targets will be U.S. taxpayers who own or control foreign account and who have not properly disclosed those foreign financial accounts. The taxpayers will likely be selected by use of “matching” programs which compare the list of filers of Reposrts of Foreign Financial Accounts, (“FBARS”), with the information provided by foreign financial institution under FATCA information exchange agreements. The taxpayers selected for exam will face intense scrutiny as the IRS looks for unreported financial accounts, foreign gifts, bequests and inheritances, foreign trusts and foreign partnership interests. While the stated goal is to encourage compliance the reality is that many taxpayers will be assessed huge penalties and some will face prosecution.

The penalty for “willfully” failing to timely disclose a foreign financial account is the greater of 50% of the highest account balance for the year of $100,000. The penalty applies each year for up to six years. One of the questions to be determined is whether taxpayers with cryptocurrency accounts need to disclose those accounts on FBARS if they are held through offshore “exchanges”. The IRS has issued “guidance” that cryptocurrency is “property” and is not currency and, therefore, the account may not have to be disclosed under the Internal Revenue Code. However income earned from cryptocurrency is taxable either as Long Term Capital Gain or Ordinary Income depending on the holding period and whether the cryptocurrency is held for investment or is trading inventory. However, the FBAR filing requirement is determined under the Bank Secrecy Act (“BSA”) and under the BSA it appears reporting is required. The IRS is also the enforcement agent under the Bank Secrecy Act (“BSA”). The IRS is seeking the names and account information of cryptocurrency account holders from “exchanges” through the use of John Doe Summons procedures (see, Coinbase for example). The safest move is to disclose cryptocurrency accounts on an FBAR and report income earned on your state and federal income tax returns.

For taxpayers who have undisclosed foreign financial accounts or cryptocurrency accounts the IRS offers several come clean voluntary disclosure programs. We are experts in protecting our clients through the use of voluntary disclosures. The risk of discovery has never been greater for holder of undisclosed accounts. Your bank will turn you in if you have not come forward fist. It is only a matter of time until you are contacted by the IRS if you have a foreign financial account. If you have a cryptocurrency account you will likely be discovered as a result of the IRS extracting cooperation from your exchange. Either way coming forward is much less expensive and reduces the risk of prosecution. The adage that “you can pay me now or pay me much more later” has never been more true.