There are several ways to cure foreign bank account noncompliance. The primary method is the Streamlined Compliance Procedure. In order to qualify for the Streamlined Compliance Procedures, the taxpayer’s failure to disclose his or her foreign bank accounts must be non-willful, he or she must have timely filed US tax returns for the last three years and he or she must not be under audit. Importantly, part of the Streamlined Compliance Procedures requires a taxpayer to certify – under penalties of perjury – that they did not act willfully in failing to disclose their foreign bank accounts. This is done on an IRS Form 14654. A taxpayer must proceed with extreme caution when making written representations and statements to the IRS concerning “intent”. A misstep here can quickly turn an FBAR civil compliance case to a criminal case. Crimes are triggered by unlawful intent, as opposed to negligent mistake.
While there are other important procedural requirements, the IRS Form 14654 is arguably the most important. The Streamlined Compliance Procedures are designed to reduce or eliminate the IRS’s assertion of penalties. By coming forward voluntarily, Streamlined Compliance Procedures reduce a taxpayer’s penalty exposure to a mandatory 5% Streamlined Penalty. Depending on all the facts and circumstances, a mandatory 5% is a significant upfront benefit as compared to the potential for much higher penalties if later “discovered” by the IRS. Another benefit of voluntary disclosure is the IRS’s agreement that tax returns will not automatically be audited. They may be audited, and additional penalties may apply (at the discretion of that IRS), but an audit is not automatic – like it would be upon discovery.
Although the IRS “officially” closed its Offshore Voluntary Disclosure Program (OVDP) in 2018, IRS guidance still permits new submissions under different procedures but in coordination with the Streamlined Procedures. If a taxpayer is concerned about “willful” conduct, he or she is advised to utilize the IRS’s OVDP procedures. Navigating these murky waters are very complicated and it is advisable that a taxpayer seek legal help by a tax lawyer. Even the IRS, in its public guidance, advises taxpayers: if a failure to file required foreign bank accounts disclosures “was due to willful conduct and [those who] seek assurances that they will not be subject to criminal liability and/or substantial monetary penalties should consider participating in the Offshore Voluntary Disclosure Program and should consult with their tax professional or legal advisers”.
Not all is lost if a taxpayer fails to report his or her foreign bank accounts; but making the right choices to voluntary disclose and when and how is complex and depends upon a variety of important legal considerations. Consult with a tax lawyer before going it alone – there is too much at stake.