Unreported Income Abroad? Consider the OVDP Before FATCA Kicks In
As a Forbes’ tax blogger recently noted, the Foreign Account Tax Compliance Act is about to make any recent tax sins deadly. FATCA requires overseas banks to turn over the identities of their U.S. account holders to the IRS, and that’s already underway. FATCA also exposes noncompliant taxpayers to major fines, 40-percent underpayment penalties and possible criminal prosecution. It’s currently slated to go into effect in July 2014, but it’s retroactive to March 18, 2010.
FATCA applies if you have financial interests or signatory authority over foreign bank accounts exceeding $50,000 in any covered tax year, and the IRS is working hard to find them. If it discovers them before you take action, you could be facing serious financial liability and possible tax evasion or fraud charges. Even a civil tax fraud action can mean penalties of up to 75 percent — and there is no statute of limitations.
A related law requires those with overseas accounts of $10,000 or more to file a Report of Foreign Bank and Financial Accounts, or FBAR. So those covered by FATCA must file a FBAR as well as FATCA’s Form 8938 for the appropriate taxable years. Failure to file either can result in extraordinary financial penalties even for non-willful failures.
To comply with these requirements for past years while limiting the penalties, you can take advantage of the IRS’s Offshore Voluntary Disclosure Program. Under the current program, Americans living in the U.S. can submit up to eight amended tax returns and FBARs. You would still pay a penalty, but it’s substantially lower and filers won’t be criminally prosecuted. There’s a similar program for some Americans living overseas.
However, you can only use the OVDP if the IRS doesn’t discover any undisclosed accounts before you apply. Also, the IRS could cancel the program at any time without notice. Quality legal advice is strongly recommended when dealing with these issues.
A few more key points from Forbes:
- If you owe U.S. taxes and amend your tax returns and file FBARs without going through the OVDP and the IRS catches you, the penalties could be harsh. It’s still better than doing nothing, however.
- Don’t just comply with these laws in the future; it’s risky.
- Closing the accounts now, without dealing with past FATCA and FBAR violations may indicate to the IRS that you are trying to conceal your activities.
Source: Forbes, “7 Sins With Bank Accounts? FATCA Makes Them Deadly,” Robert W. Wood, Dec. 15, 2013