As April 17, 2018 Is Coming Up, IRS Reminds Those Taxpayers With Foreign Assets About U.S. Tax Obligations

The IRS on April 9, 2018 in a press release reminded U.S. citizens and resident aliens, including those with dual citizenship, to check if they have a U.S. tax liability and a filing requirement. At the same time, the IRS affirmed that anyone with a foreign bank or financial account to remember the upcoming deadline that applies to reports for these accounts known as the annual Report of Foreign Bank and Financial Accounts (FBAR). Here are some of the key points of the press release and our comments.

Deadline For Reporting Foreign Accounts On An FBAR

The deadline for filing the FBAR is the same as for a federal income tax return. This means that the 2017 FBAR, Form 114, must be filed electronically with the Financial Crimes Enforcement Network (FinCEN) by April 17, 2018 (see below why this deadline for the 2017 tax year is not April 15^th). FinCEN grants filers missing the April 17^th deadline an automatic extension until October 15, 2018, to file the FBAR. Specific extension requests are not required. In the past, the FBAR deadline was June 30^th and no extensions were available. In general, the filing requirement applies to anyone who had an interest in, or signature or other authority, over foreign financial accounts whose aggregate value exceeded $10,000 at any time during 2017. The form is only available through the BSA E-Filing System website and must be filed electronically. There is no paper filing option.

Offshore Voluntary Disclosure Program

The IRS announced on March 13, 2018 that it will begin to ramp down the 2014 Offshore Voluntary Disclosure Program (“OVDP”) and close the program on September 28, 2018. OVDP enables U.S. taxpayers to voluntarily resolve past non-compliance related to unreported foreign financial assets and failure to file foreign information returns.

Where a taxpayer does not come forward into OVDP and has now been targeted by IRS for failing to file the Foreign Bank Account Reports (FBAR), the IRS may now assert FBAR penalties that could be either non-willful or willful.  Both types have varying upper limits, but no floor.  The first type is the non-willful FBAR penalty.  The maximum non-willful FBAR penalty is $10,000.  The second type is the willful FBAR penalty.  The maximum willful FBAR penalty is the greater of (a) $100,000 or (b) 50% of the total balance of the foreign account.  In addition the IRS can pursue criminal charges with the willful FBAR penalty. The law defines that any person who willfully attempts in any manner to evade or defeat any tax under the Internal Revenue Code or the payment thereof is, in addition to other penalties provided by law, guilty of a felony and, upon conviction thereof, can be fined not more than $100,000 ($500,000 in the case of a corporation), or imprisoned not more than five years, or both, together with the costs of prosecution (Code Sec. 7201).

For the non-willful penalty, all the IRS has to show is that an FBAR was not filed.  Whether the taxpayer knew or did not know about the filing of this form is irrelevant.  The non-willful FBAR penalty is $10,000 per account, per year and so a taxpayer with multiple accounts over multiple years can end up with a huge penalty.

Since 2009, the IRS Criminal Investigation has indicted 1,545 taxpayers on criminal violations related to international activities, of which 671 taxpayers were indicted on international criminal tax violations.

The IRS will continue to use streamlined filing compliance procedures but as with OVDP, the IRS said it may end the streamlined filing compliance procedures at some point.

Most People Abroad Need To File

An income tax filing requirement generally applies even if a taxpayer qualifies for tax benefits, such as the Foreign Earned Income exclusion or the Foreign Tax credit, which substantially reduce or eliminate U.S. tax liability. These tax benefits are only available if an eligible taxpayer files a U.S. income tax return.

A special extended filing and payment deadline applies to U.S. citizens and resident aliens who live and work abroad. For U.S. citizens and resident aliens whose tax home and abode are outside the United States and Puerto Rico, the income tax filing and payment deadline is June 15, 2018. The same applies for those serving in the military outside the U.S. and Puerto Rico.

Regardless that the filing deadline is June 15^th, interest, currently at the rate of 5% per year, compounded daily, will apply to any payment received after the regular April 17^th deadline so for those persons having the extended June 15^th deadline, it would be best to pay any expected amount owed no after than April 17^th. Nonresident aliens who received income from U.S. sources in 2017 also must determine whether they have a U.S. tax obligation. The filing deadline for nonresident aliens is April 17^th.

Form 8939 And Reporting Foreign Income On A U.S. Individual Income Tax Return

Federal law requires U.S. citizens and resident aliens to report any worldwide income, including income from foreign trusts and foreign bank and securities accounts. In most cases, affected taxpayers need to complete and attach Schedule B to their tax return. Part III of Schedule B asks about the existence of foreign accounts, such as bank and securities accounts, and usually requires U.S. citizens to report the country in which each account is located.

In addition, certain taxpayers may also have to complete and attach to their return Form 8938, Statement of Foreign Financial Assets. Generally, U.S. citizens, resident aliens and certain nonresident aliens must report specified foreign financial assets on this form if the aggregate value of those assets exceeds certain thresholds.

Report In U.S. Dollars

Any income received or deductible expenses paid in foreign currency must be reported on a U.S. tax return in U.S. dollars. Likewise, any tax payments must be made in U.S. dollars. Both FinCEN Form 114 and IRS Form 8938 require the use of a December 31^st exchange rate for all transactions, regardless of the actual exchange rate on the date of the transaction. The Department Of Treasury publishes rates to use for this purpose which can be accessed here.

Expatriate reporting

Taxpayers who relinquished their U.S. citizenship or ceased to be lawful permanent residents of the United States during 2017 must file a dual-status alien return, attaching Form 8854, Initial and Annual Expatriation Statement. A copy of the Form 8854 must also be filed with Internal Revenue Service, Philadelphia, PA 19255-0049, by the due date of the tax return (including extensions).

Penalties For Filing A False Income Tax Return Or Under-reporting Income

Failure to report all the money you make is a main reason folks end up facing an IRS auditor. Carelessness on your tax return might get you whacked with a 20% penalty. But that’s nothing compared to the 75% civil penalty for willful tax fraud and possibly facing criminal charges of tax evasion that if convicted could land you in jail.

Criminal Fraud – The law defines that any person who willfully attempts in any manner to evade or defeat any tax under the Internal Revenue Code or the payment thereof is, in addition to other penalties provided by law, guilty of a felony and, upon conviction thereof, can be fined not more than $100,000 ($500,000 in the case of a corporation), or imprisoned not more than five years, or both, together with the costs of prosecution (Code Sec. 7201).

The term “willfully” has been interpreted to require a specific intent to violate the law (U.S. v. Pomponio, 429 U.S. 10 (1976)). The term “willfulness” is defined as the voluntary, intentional violation of a known legal duty (Cheek v. U.S., 498 U.S. 192 (1991)).

And even if the IRS is not looking to put you in jail, they will be looking to hit you with a big tax bill with hefty penalties.

Civil Fraud – Normally the IRS will impose a negligence penalty of 20% of the underpayment of tax (Code Sec. 6662(b)(1) and 6662(b)(2)) but violations of the Internal Revenue Code with the intent to evade income taxes may result in a civil fraud penalty. In lieu of the 20% negligence penalty, the civil fraud penalty is 75% of the underpayment of tax (Code Sec. 6663). The imposition of the Civil Fraud Penalty essentially doubles your liability to the IRS!

If You Did Not Report Your Offshore Accounts Before 2017, Consider Holding Off On Filing Your 2017 Taxes And Instead File An Extension.

An extension is your way of asking the IRS for additional time to file your tax return. The IRS will automatically grant you an additional six months to file your return. While State Tax Agencies will also provide the same extension period, you need to check with your State to see if an extension must be filed with the State as well. California does not require that a State extension be filed as long as you timely file the Federal extension AND you will not owe any money to the State.

Because April 15, 2018 falls on a Saturday and the following Monday, April 17^th, is Emancipation Day which is a legal holiday in the District of Columbia, the deadline to file your 2017 individual income tax returns or request an extension of time to file the tax return is April 18, 2018. Under the tax law, legal holidays in the District of Columbia affect the filing deadline across the nation. A timely filed extension will extend the filing deadline to Monday, October 15, 2018 thus giving you an extra six months to meet with tax counsel and determine how to address your pre-2017 tax reporting delinquencies and how to present your situation on your 2017 tax return.

While an extension gives you extra time to file your return, an extension does not give you extra time to pay your tax and if you do not pay what you owe with the extension, you will still be ultimately charged with late payment penalties when you file your tax return.

What Should You Do?

Individual taxpayers can file an extension using Form 4868. Extensions can also be filed online, which has the benefit that you’ll receive a confirmation code from the IRS notifying you that your extension was received. Then you should promptly contact tax counsel. Don’t delay because once the IRS has targeted you for investigation – even it’s is a routine random audit – it will be too late voluntarily come forward. Let the tax attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), San Francisco Bay Area (including San Jose and Walnut Creek) and offices elsewhere in California get you set up with a plan that may include being qualified into a voluntary disclosure program to avoid criminal prosecution, seek abatement of penalties, and minimize your tax liability.