Voluntary Disclosure and FBAR FAQs
Since the mid 1980's San Diego tax attorney William D. Hartsock has worked with clients to represent their best interests before the IRS. Mr. Hartsock offers significant expertise in the area of offshore voluntary disclosure and FBAR programs.
What is the IRS voluntary disclosure program?
The IRS voluntary disclosure program started in the 1950's and it's purpose was to allow the tax payer to go to the IRS, before the IRS had to track them down, and disclose something that they have done wrong. If they do, then the IRS will take that into consideration in determining whether to prosecute criminally. When they do that, the IRS will look at all of the facts and circumstances. If it's some new information that the IRS has no knowledge of whatsoever, then they really will take that into consideration and are far more likely to choose not to go after you criminally. They will collect the taxes, penalties and interest, but they won't file criminal charges.
However, if they do already have knowledge that you have been significantly understating your income, or if your returns are full of things that are so ridiculous that you were going to get audited anyway… if you significantly understated your income or obviously overstated your deductions, the IRS will look at that and say it was just a matter of time before you inevitably were audited.
Here is the thing, once the IRS decides to audit you, it takes 6-9 months for that audit to actually make it's way through the system before you are aware of the audit. So, if the audit is already in process but the revenue agent has not yet sent out the letter to you, that will be taken into consideration too. In the event that the person was doing criminal acts, that would also be considered. But this program has existed since the 1950's.
Then in 2009, 2011 and then again in 2012 the IRS had specific programs that included specific rules and regulations under the Voluntary Disclosure program where they essentially gave particular deals. Unfortunately the due date for qualifying for those programs is over with.
The 2012 offshore disclosure program is the only one that is still in existence today. Under this program, there are some requirements that must be met. 1. The IRS has not already started an internal investigation. The IRS has not yet started a criminal investigation. And, the IRS does not have specific knowledge about the persons understatement of tax liability, by an informant (business partner gone bad, ex-spouse, civil litigation plaintiff, etc…). Also, the under-reported income must be from a legal source. The under-reported income cannot be from an illegal source. If those criteria are met, then the IRS will allow someone to go into the voluntary disclosure program.
What are considered a legal and illegal sources of income for the voluntary disclosure program?
Illegal sources of income are things like drugs, gun running, prostitution or theft, those types of things are considered illegal sources, activities that would qualify as illegal according to both federal and local laws.
Legal sources of income that may have produced an understatement of tax liability could include things such as: skimming from the taxpayers business, underreporting 1099's, overstating deductions, etc… for the purposes of the offshore disclosure program, this would be the underreporting of foreign bank accounts. If that money that was deposited in the foreign bank account was not reported on your tax return but it was received from a legal source and then you just didn't report the income, or you didn't report the interest income, dividend income, capital gains or losses that were generated from the money in that bank account. Then that's from a legal source and you can go into the voluntary disclosure program.
What if my foreign income was generated from activities that were legal in the country where the income was generated, but would not have been legal in the US? Would that income qualify as legal income for the purposes of the IRS offshore voluntary disclosure program?
Yes. As long as the activities that generated the income were legal activities where they took place and were legal where the money exchanged hands. Then those would be considered legal activities under the IRS voluntary disclosure program.
What is FBAR?
All United States citizens, resident aliens and people who comply with the substantial presence test are required to report world wide income on their US tax returns, less a credit for taxes paid to other countries on that income.
In addition to that, United States citizens, resident aliens and individuals who comply with the substantial presence test are also required to report the existence of foreign bank accounts on the FBAR (foreign bank account reporting) form is TD9022.1. All that is really doing is making a record of the name, address and account number of all foreign bank accounts that you have a signature authority over or a financial interest in that are outside the US, as well as the highest balance amount at any time over the previous year. It is just an information return, it is not a tax return, there are no taxes due as a result of an FBAR. It is information only.
The IRS takes it, it sits there, and in the event that you get audited eventually, the agent can take all of your FBAR's and see what you have in the way of foreign bank accounts, and look into whether you reported it or not. That's all it is.
What if a substantial amount of money moved through one of my foreign bank accounts, but it is not my money, could I get into trouble by reporting it?
If you can account for the flow of money, then you will not get in any trouble for reporting it. If the money passed from this account, to that account and then to another account, you just have to be able to document the transactions. As long as the money was not obtained through anything illegal, then you run no risk in reporting it.
It is the failure to report the account that creates significant penalties. That is what people have gotten into trouble for in the past is not reporting it. If you report it, there are no consequences, it is not a taxable document.
The IRS does not currently have the capability to utilize the FBARs to trigger audits or returns. At this time they are only used to provide a paper trail. It is certainly possible, that in another 5-10 years this information could be used to trigger an audit, but that is not what happens now.
At the present time, these are used if you get audited for another reason, the revenue agent will look at the FBARs in an effort to get a complete financial picture.
How can the FBAR be used against you?
If you have a foreign bank account, or multiple foreign bank accounts, and they show deposits for millions of dollars, yet you are reporting no income on your tax returns, then that would be a problem. This is an example of how the FBAR can be used against you by the IRS. However, if you are fully reporting your income and taking correct and legal deductions, then you have nothing to fear about filing an FBAR. The real fear should come from not filing an FBAR because if foreign bank accounts are unreported and then later found through an IRS audit, then you could face substantial penalties for not reporting them.
Right now when you file an FBAR it goes into your file, and in the event of an audit the IRS revenue officer will use those documents to ensure that you have reported the income from those accounts including interest income, dividend income, capital gains or losses that were generated from the money in that bank account. That is how it is used.
It can also be used for criminal purposes. If you are a United States citizen, a resident alien or comply with the substantial presence test, and you are doing something illegal, and pass money through your bank accounts in a foreign country, that money still needs to be reported on an FBAR. If that money is from an illegal source, the IRS can use those forms to prove that you had that money in those accounts. Whereas they may not be able to get the bank statements, from the foreign bank. So, if you are doing illegal activities, the FBAR can be used against you.
Who qualifies for the voluntary disclosure program?
Anyone can qualify for the voluntary disclosure program, as long as they meet the requirements.
The first requirement is that you contact the IRS before the iRS notifies you, before the IRS begins an audit, or before an informant has reported your activities to the IRS. The second thing is that it cannot be illegal source income.
All you have to do then is submit to the IRS a one page form with name, social security number and what tax years it is for. The IRS will look at it and see if you are being audited, under investigation or if they already know of things that would lead to actions against you for the years that you are inquiring about… and if they find that those things already exist then they will tell you that you don't qualify.
If the IRS tells you that you don't qualify, then that means that they know something about you and you will find out eventually. Remember it can take 6-9 months before you ever find out that you are being audited.
Will I owe penalties and interest if I qualify for the voluntary disclosure program?
Yes. The biggest downside on the 2013 offshore voluntary disclosure program is that you have to pay a penalty equal to 27.5% of the maximum amount in all of your foreign bank accounts and of all your foreign assets that were not disclosed on your tax returns. That is huge and it is the biggest detriment.
However, in exchange for reporting it, what the IRS will do is not go after you criminally.
What are the benefits of the IRS voluntary disclosure program?
The biggest benefit of the IRS voluntary disclosure program is that the IRS will not go after you criminally for the income and assets that had gone unreported. That is failure to report your FBARs, failure to report your foreign bank accounts and failure to report your assets. Now there are very significant penalties for those if the iRS was to find out about it on their own and go after you criminally. But the voluntary disclosure program will shield you from any such criminal charges.
This is a really big deal because at the bottom of everyones person income tax form schedule b, there is a box that asks if you have signature authority or interest in any foreign bank account. And, if you check no, but you do have a signature authority or other authority over a foreign bank account, then that is a false statement. A false statement is a 7206 felony. The IRS would go after you criminally for that.
Can I represent myself when filing an FBAR?
Yes you can, however it's never a good idea. You should really always use a tax attorney in these situations. That is because with your CPA, or tax preparer you do not have any attorney client privilege and they can be called into court and forced to disclose the contents of your conversation. However, with an attorney you have attorney client privilege. That means that you can fully disclose everything and really have someone who is legally responsible for providing you the best advice and information that they possibly can, and that is legally required to keep the contents of your conversations in strict confidence and private. This is a huge benefit because you really cannot effectively gather advice by using hypotheticals, you really have to tell someone about it, and if there is no attorney client privilege then those conversations are not protected. That is why you always want to work with a good tax attorney for these situations.
What if I don't submit an FBAR and the IRS finds out about my foreign bank accounts before I report them?
If you have unreported foreign bank accounts and the IRS finds them, the penalty will be 50% of the value of the account per year that they went unreported. So, if the account goes unreported for three years then the penalty would be 150% of the total value of the account. These severe penalties were enacted to provide a significant deterrence to anyone that would attempt to hide income and evade taxes.