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Delinquent FBAR Reporting and How to Come Forward? Fact and Choice of Method Really Matter!!!

By admin of MillarLaw A Professional Corporation On Monday, June 15, 2015

FBARS for 2014 are Due and MUST BE FILED by June 30, 2015

There are three approaches to coming forward and filing delinquent FBAR’s (Report of Foreign Financial Account). They are:

1. The Delinquent Filing Procedure

2. The Streamline Domestic Procedure and Streamline Non-resident Procedure

3. The Offshore Voluntary Disclosure Program

The choice of which method to use is a highly individual and fact driven decision and depends on whether the omission is “willful” or “non-willful”. There are substantial differences between the programs. Example: Least Willful, The Delinquent Filing Procedure is described in a recent IRS Announcement

“The IRS will not impose a penalty for the failure to file the delinquent FBARs if you properly reported on your U.S. tax returns, and paid all tax on, the income from the foreign financial accounts reported on the delinquent FBARs, and you have not previously been contacted regarding an income tax examination or a request for delinquent returns for the years for which the delinquent FBARs are submitted.”

The Delinquent Filing Procedure may seem to many as an ideal way of coming forward with no penalties. But read the language carefully, First, it only applies to FBAR’s not other unfiled returns, such as Controlled Foreign Corporation Returns (Form 5471), or Reports of Foreign Gifts, Devises and Bequests (Form 3520). The penalty for not timely filing a Form 5471 is $10,000 per year per CFC. The penalty for not filing a Form 3520 is 25 percent of foreign inheritance and 35 percent of foreign gifts.

Second, all taxes on unreported foreign financial assets must have been paid. This means that all foreign income as reported on U.S. tax returns, which means Schedule B Part 3 on Form 1040 was properly completed. If there was no taxable income because of foreign tax credits, and therefore the foreign income was not reported on the U.S. returns, then one of the Streamline Procedures may be appropriate.

The Domestic Streamline Procedure imposes an FBAR penalty of 5% of highest year-end account balance for the preceding six years and amended income tax returns for the preceding 3 years. There is no FBAR penalty for a non-resident Streamline filing. BUT as in the Delinquent Filing Procedure is there are other unfiled returns, like Form 5471 or Form3520 then those penalties may still be imposed. Which take us to the OVDP.

The OVDP penalty ranges from 27.5% of the highest single year account balance for the preceding 8 years, and an income tax penalty of 20% of the tax on the unreported income for most filers, and includes all previously unfiled returns. The exception to the 27.50 program is if the taxpayer has an account at a foreign financial institution which has been publically identified by the Department of Justice as a 50 percent in which case the FBAR penalty increases to 50 percent. Other criteria may apply as well to increase the penalty to 50 percent. However, whether the taxpayer has willfully attempted to avoid the FBAR filing rules, or was simply negligent, by entering the OVDP intent, (state of mind) is no longer an issue.

There are other important differences between the Delinquent Filer and Streamline Procedures (both non-willful programs) and the OVDP such as the lack of a waiver of prosecution.

We at MillarLaw know the in’s and out’s of the means and methods of coming forward in the most cost efficient and safest manner. We provide a comprehensive analysis individually tailored to your specific facts so that you can make the right decision. We look forward  to helping you.

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Millar Law A Professional Corporation

1900 Avenue of the Stars, STE 2300 | Los Angeles, CA 90067
Phone: 310.486.6705 Fax: 310.861-1863
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