Streamlined FBAR Compliance
Admissions Used for Examination or Criminal Prosecution?
In June of 2012, the IRS announced the streamlined FBAR filing compliance procedure for non-resident U.S. taxpayers and dual citizens. The initiative, which went into effect on September 1, 2012, is based upon the rationale that these taxpayers may have been unaware of their US filing obligations and, as such, failed to timely file US income tax returns and FBARs. The question presented is whether an admission under the streamline procedure may subject the taxpayer to IRS audit or potential criminal prosecution. The answer is yes.
The instructions under the new streamlined procedure caution that:
“Taxpayers who are concerned about the risk of criminal prosecution should be advised that this new procedure does not provide protection from criminal prosecution if the IRS and Department of Justice determine that the taxpayer’s particular circumstances warrant such prosecution. Taxpayers concerned about criminal prosecution because of their particular circumstances should be aware of and consult their legal advisers about the Offshore Voluntary Disclosure Program (OVDP), announced on January 9, 2012, which offers another means by which taxpayers with undisclosed offshore accounts may become compliant.”.
The decision to utilize this new initiative should be carefully weighed against the possible civil and criminal consequences for the following reasons:
First, the Program is only open to non-resident U.S. taxpayers who have resided outside of the U.S. since January 1, 2009 and who have not filed a U.S. tax return during the same period.
Second, qualifying taxpayers must present a low level of compliance risk, i.e., submitted returns and the application must show less than $1,500 in tax due in each of the years involved.
Third, Taxpayers taking advantage of this procedure will be required to submit: (1) delinquent tax returns, with appropriate related information returns, for the past three years, (2) delinquent FBARs for the past six years, and (3) complete a special Questionnaire. The information furnished in the Questionnaire and the FBAR’s can be used for both audit and criminal investigation purposes.
Fourth, payment of any federal tax and interest due must accompany the submission. In the event, a refund is claimed on any return submitted through the Program; the IRS has cautioned that the risk level may rise. This means you are likely to be subject to an audit and may be flagged for further investigation.
Fifth, the IRS requires that returns submitted through this program must clearly identify that the return is being submitted under the Program by designating at the top of the tax return that the return is “Streamlined.” The highlighting of a return as “Streamlined” is an invitation to an audit and further investigation.
For those taxpayers presenting low compliance risk, the IRS claims the review will be expedited and they will not assert penalties or pursue follow-up actions. The problem with this approach is that the determination of the level of risk is being made in the sole discretion of the IRS.
Furthermore, the IRS has indicated that the risk level may rise if any of the following elements are present:
- Any of the returns submitted through the program claims a refund;
- There is material economic activity in the U.S.
- The taxpayer has not declared all of his/her income in his/her country of residence, or is under audit or investigation by IRS;
- FBAR penalties have been previously assessed against the taxpayer or if he/she has previously received an FBAR warning letter;
- The taxpayer has a financial interest or authority over a financial account(s) located outside his/her country of residence;
- The taxpayer has a financial interest in an entity or entities located outside his/her country of residence
- There is U.S. source income; or
- There are indications of sophisticated tax planning or avoidance.
According to the IRS announcements, submissions that present higher compliance risk are not eligible for the streamlined processing procedures and will be subject to a more thorough review and possibly a full examination, which in some cases may include more than three years, or worse yet, potential criminal investigation.
Based upon the foregoing, a taxpayer faced with late filing of income tax returns or FBAR reports should consult a competent and experienced tax attorney in order to assess the potential risk of filing under the streamlined program.