Since 2009, the Offshore Voluntary Disclosure Program (OVDP) has been available to Taxpayers who have foreign assets, foreign financial accounts, and foreign source income unreported for U.S. Income Tax and Bank Secrecy Act purposes. In addition, in June of 2014 the IRS announced the Streamlined Procedures to further encourage Taxpayers to come forward and remedy prior failures to disclose foreign assets and foreign income. With the release of Panama Papers, those U.S. citizens and permanent residents who did not take advantage of the OVDP and the Streamlined Procedures, an IRS civil audit may be in the horizon. There is also risk of criminal investigation relating to the foreign offshore holdings.
If you received communication from the IRS and suspect the communication may be related to your offshore holdings you are ineligible for the OVDP. Additionally, once you are contacted by the IRS, it is not advisable that amended returns be filed under the Streamlined Procedures. At this point, the Taxpayer should contact an attorney to determine the income tax and penalty exposure related to the foreign assets and unreported income.
Under a civil examination, any foreign source previously unreported income will be subject to income tax and a twenty percent accuracy related penalty. Additionally, penalties related to international information returns will be imposed for failure to timely file the forms, which include but are not limited to, Form 3520 Annual Return to Report Transactions with Foreign Trusts and Receipts of Certain Foreign Gifts, Form 3520-A Annual Information Return of Foreign Trust with a U.S. Owner, Form 5471 Information Returns of U.S. Persons with Respect to Certain Foreign Corporations.
The IRS also has the authority to initiate civil examination for Report of Foreign Bank and Financial Accounts (FBAR), and impose penalties under the Bank Secrecy Act. The civil FBAR penalty for willful violation of the FBAR provisions exposes the taxpayer to a maximum penalty of the greater of $100,000 or 50 percent of the aggregate highest annual account balance per year for up to six years.
At the conclusion of the IRS civil examination, Taxpayers who disagree on the income adjustments and/or imposed penalties may appeal the matter to IRS Appeals. Both income tax items, information return penalties, and Bank Secrecy penalties for FBARs may be included in the appeal process. The Appeals Officer may sustain the findings of the IRS examination, which in general cases allow the Taxpayer to file a petition to Tax Court. However, Tax Court does not have jurisdiction over FBAR penalty because penalties for failure to file an FBAR is governed by Title 31, Bank Secrecy Act.
In an unagreed FBAR case, Taxpayers have two options. To challenge the assessment of the penalty, Taxpayer may file a complaint in either in District Court or the Court of Federal Claims under the Tucker Act. Or, Taxpayers may wait for the Government to initiate a collection of the penalty under Fair Debt Collection Practices Act. The Federal Debt Collection Procedure Act also known provides three remedies for enforcing civil judgments: (1) execution, (2) garnishment and (3) installment payment orders.
If you have questions about your options you should contact skilled counsel to evaluate your case.