We've previously written about the new reporting requirements imposed upon U.S. citizens with foreign bank accounts. Under the Internal Revenue Service's Report of Foreign Bank and Financial Accounts and Foreign Account Tax Compliance Act, U.S. citizens with foreign assets valued at $50,000 or more are required to file the proper documents disclosing specific details about such assets.
FBAR and FATCA were enacted to discourage and penalize U.S. citizens who were using foreign financial institutions or investments to evade paying taxes. For those taxpayers who previously failed to fully comply with IRS regulations, there is a way to rectify these issues and ensure you are complying in the future.
The IRS offers two options to correct past tax deficiencies with regard to foreign accounts via the Offshore Voluntary Disclosure Program and the streamlined procedures. Which program and individual chooses depends upon whether or not he or she willfully or knowingly violated tax laws. When determining whether a violation was willful or non-willful, the IRS looks at the nature of the and an individual must also provided certification related thereto.
In cases where a violation was willful, an individual can apply to participate in the OVDP program. Under this program, an individual must be able to produce tax returns and FBARs for the last eight years. An individual must then "pay taxes on any unreported income, interest, and a 20 percent penalty." The IRS then slaps on an additional penalty which ranges anywhere from 27.5 to 50 percent of the total balance of an account.
If the IRS determines that a violation was non-willful, an individual must produce tax returns for the last three years and FBARS for the last six years. Citizens who live in the U.S. must pay a five percent penalty on any unreported income and interest while U.S. citizens who are living abroad don't pay anything.
Attempting to sort out matters related to foreign assets and the IRS' reporting requirements can be confusing. What's more, failing to comply completely with these requirements can result in hefty penalties. It's always wise, therefore, to consult with an attorney who handles tax matters.
Source: IRS.gov, "2012 Offshore Voluntary Disclosure Program," Jan. 26, 2016