Out of the Frying Pan & Into the Fire, Offshore Taxes & FBAR

Know the Risks Before You Take Them

While most tax preparers and CPAs are ethical, sometimes a tax preparer may push a client into a tax position that only benefits the preparer. In this type of situation, the CPA goads a U.S. taxpayer client into either taking a tax position that is not supported by law or taking action that is otherwise improper. This has become a much more common issue on matters involving foreign account reporting. Oftentimes, taxpayers will approach us and explain that they had spoken to their initial tax preparer who prepared their original return, or a new CPA and that these practitioners recommended that the taxpayer submit a ‘quiet disclosure’ instead of submitting to one of the approved international tax amnesty programs such as the Streamlined Filing Compliance Procedures, VDP, or delinquency procedures.

The Client is Left Holding the Bag

What taxpayers must remember is that ultimately, they are responsible for the information contained in their tax return — unless the tax preparer submits the return without the approval of the taxpayer. In other words, if the taxpayer knows the CPA is taking a position or submitting a form that is not accurate, they can become subject to fines and penalties even though the CPA recommended the strategy and even submitted the return on behalf of the taxpayer. Thus, it is the taxpayer who will get fined (tax preparers can get in trouble as well, but the focus of this article is the impact it can have on unsuspecting taxpayers).

Offshore Disclosure Example

David is a Lawful Permanent Resident. He first came to the United States on an F-1 visa, then transitioned to an H-1B Visa — and then to Lawful Permanent Resident (Green Card) status. While David was on an F-1 visa (less than 5 years), he was not considered a U.S. person for tax purposes and was not required to report his foreign account, assets, investments, or income. And, since his finances did not change between transitioning from an F-1 visa to an H-1B visa holder and meeting the Substantial Presence Test he was unaware that he had several international information reporting requirements such as the FBAR and Form 8938.

David understandably believed that until he became either a permanent resident or a U.S. citizen these rules did not apply to him.

Taxpayer Meets with a New CPA

Recently, after David became a Lawful Permanent Resident he met with a new CPA who told him that he was several years delinquent for failing to previously report his foreign accounts, assets, and income — and that they all should have been reported to the IRS.

The CPA recommends that:

• • • David not speak with anyone else,

  • • immediately retain his services, and

  • • start filing forward because the IRS would probably not catch him and he could take care of it for him quickly.

He tells David if he submits to the offshore disclosure program, he can be subject to hundreds of thousands of fines and penalties.

Taxpayer CPA Has An Ulterior Motive

David’s CPA knows if David speaks with other CPAs, they will recommend that David seek a Board-Certified Tax Law Specialist (dual-licensed as an EA or CFA/CPA) to assist him. Therefore, the CPA tries to scare David into retaining now, not speaking with anyone else, and just start filing forward.

David’s CPA also knows if David is audited, he will simply tell the IRS David did not tell him when the accounts were first opened.

Taxpayer Does His Research

That evening, David goes home and researches offshore disclosure. He realizes that he is out of compliance for the years that he was an H-1B visa holder and Lawful Permanent Resident. He is scared because of all the fear-mongering information he has read online, but he is aware that if he just begins filing forward that would be considered a quiet disclosure and that is illegal.

He is not sure what to do.

Which Path To Take?

At this point, the taxpayer is aware that he has unreported foreign accounts, assets, and income — but he is clearly non-willful. If he submits to the Streamlined Procedures, he would be subject to a 5% penalty (but several of his accounts/assets are not subject to the 5% penalty, see below). He is also aware that filing forward (aka Quiet Disclosure) is not the proper procedure.

That evening, David receives an e-mail from the CPA he spoke with asking if he is ready to begin preparing for following the current year and the CPA sends the taxpayer an agreement.

The Next Morning

After considering his options, David makes the fateful decision to go with the CPA and begin filing forward. He had a bit of a pit in his stomach knowing that this was not the best way to go, but he was worried about potential fines and penalties for the prior year’s non-compliance.

Taxpayer’s Penalties Would Have Been Less Than He Expected

Unfortunately, the CPA David was working with did not explain to David that the rental properties he owns are not held in an entity, so it is not subject to The Title 26 Miscellaneous 5% Offshore Penalty. In addition, two of his larger accounts were a Canadian RRSP and that is excluded from the penalty base – and are not required to be reported on Forms 3520/3520-A under Revenue Procedure 2014-55.

Finally, while he had many different accounts scattered over different countries, and at first glance, it may appear that he had very large values, oftentimes the maximum did not consider the ‘double counting ‘issues — and the streamline filing compliance penalty only uses the aggregate December 31st value of the accounts and not the maximum balance each year of each account.

A Few Years Later He Gets Audited

A few years later, the taxpayer opened his consulting firm. That year he took several deductions for his new business, but it turns out some of the deductions he took were red flags and soon thereafter his return was audited. As part of the IDR (Information Document Request) he received, it asked the taxpayer whether he had any foreign accounts and what year the accounts were opened. The taxpayer responds to the IDR himself and claims that the accounts were opened in the year that he first restarted reporting them which was a few years ago.

Unfortunately for the taxpayer, some of the countries in which he has foreign accounts are countries that the U.S. has entered into a FATCA Agreement (Foreign Account Tax Compliance Act) and so the IRS agent has information that conflicts with what the taxpayer told him. At this point, the taxpayer realizes that he is in trouble and that he may become subject to significant fines and penalties, and he hires an attorney to assist him — which in the long run will cost significantly more money than if he had entered the streamlined procedures.

Beware of Unscrupulous and Inexperienced Tax Professionals

There is a lot of misinformation on the Internet about what happens when taxpayers have unreported accounts. A majority of the time, taxpayers simply enter one of the amnesty programs, get into compliance and the issue is resolved going forward. And in fact, sometimes, penalties can be avoided altogether.

When taxpayers take the quiet disclosure route or do not file at all, they are taking a big risk. That is because hundreds of thousands of Foreign Financial Institutions (FFIs) report taxpayer account information to the IRS each year. Likewise, when taxpayers are audited, it may not be clear from the outset that they are actually under a reverse eggshell audit — in which the government already has information that contradicts what the taxpayer included in their return and the question then becomes whether the taxpayer will double-down during the audit or take a step back and avoid making any further matter representations.

In this example, the taxpayer was initially non-willful. But, after he knowingly decided to go forward and file a quiet disclosure he took a relatively innocuous non-willful (SDOP) scenario and turned it into a potentially willful violation which can result in significantly higher fines and penalties.

Late Filing Penalties May be Reduced or Avoided

For Taxpayers who did not timely file their FBAR and other international information-related reporting forms, the IRS has developed many different offshore amnesty programs to assist taxpayers with safely getting into compliance. These programs may reduce or even eliminate international reporting penalties.

Current Year vs Prior Year Non-Compliance

Once a taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, taxpayers should consider speaking with a Board-Certified Tax Law Specialist who specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties. 

Need Help Finding an Experienced Offshore Tax Attorney?

When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting. 

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure. 

Contact our firm today for assistance.