Federal Government Extends 2019 FBAR Filing Deadline For Certain Taxpayers Involved In Offshore Accounts
If you did not report your offshore accounts before 2019, beware of criminal and civil penalties that could be imposed on you.
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 time 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. For example, 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.
The deadline to file your 2019 individual income tax returns or request an extension of time to file the tax return was Wednesday, July 15, 2020 (normally would have been April 15th but extended due to COVID-19). A timely filed extension extended the filing deadline to Thursday, October 15, 2020 thus giving you an extra three months to meet with tax counsel and determine how to address your pre-2019 tax reporting delinquencies and/or exposure and how to present your situation on your 2019 tax return.
In the past, a Report of Foreign Bank and Financial Accounts (FBAR), was due June 30th regardless of whether the Federal Individual Income Tax Return was put on extension. An FBAR is e-filed with the U.S. Treasury’s Financial Crimes Enforcement Network (FinCEN) Form 114. The Surface Transportation and Veterans Health Care Choice Improvement Act of 2015, P.L. 114-41, changed FinCEN Form 114’s due date to April 15th to coincide with the due date for filing Federal income tax returns. The act changing the FBAR due date also allows for a six-month extension of the filing deadline which is automatic when filing an extension to file your Federal Individual Income 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.
Certain Taxpayers Now Have Until December 31, 2020 To File A 2019 FBAR
In a notice recently posted by FinCEN, the government announced that this year’s deadline to e-file FinCEN Form 114 on the Bank Secrecy Act (BSA) E-Filing System had been extended from October 15, 2020, to December 31, 2020) for taxpayers who are victims of recent natural disasters, specifically: the California Wildfires, the Iowa Derecho, Hurricane Laura, the Oregon Wildfires, and Hurricane Sally.
Penalties for Non-Compliance
Federal tax law requires U.S. taxpayers to pay taxes on all income earned worldwide. U.S. taxpayers must also report foreign financial accounts if the total value of the accounts exceeds $10,000 at any time during the calendar year. Willful failure to report a foreign account can result in a fine of up to 50% of the amount in the account at the time of the violation and may even result in the IRS filing criminal charges.
Civil Fraud – If your failure to file is due to fraud, the penalty is 15% for each month or part of a month that your return is late, up to a maximum of 75%.
Criminal Fraud – 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)).
Additionally, the penalties for FinCEN Form 114 noncompliance are stiffer than the civil tax penalties ordinarily imposed for delinquent taxes. For non-willful violations, it is $10,000 per account per year going back as far as six years. For willful violations, the penalties for noncompliance which the government may impose include a fine of not more than $500,000 and imprisonment of not more than five years, for failure to file a report, supply information, and for filing a false or fraudulent report.
Lastly, failing to file Form 8938 when required could result in a $10,000 penalty, with an additional penalty up to $50,000 for continued failure to file after IRS notification. A 40% penalty on any understatement of tax attributable to non-disclosed assets can also be imposed.
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.
Since September 28, 2018, the IRS discontinued the Offshore Voluntary Disclosure Program (OVDP); however, on November 20, 2018 the IRS issued guidelines by which taxpayers with undisclosed foreign bank account and unreported foreign income can still come forward with a voluntary disclosure. The voluntary disclosure program is specifically designed for taxpayers with exposure to potential criminal liability and/or substantial civil penalties due to a willful failure to report foreign financial assets or foreign in income or any unreported income whether it be domestic or foreign. In general, voluntary disclosures will include a six-year disclosure period. The disclosure period will require examinations of the most recent six tax years so taxpayers must submit all required returns and reports for the disclosure period. Click here for more information on available Voluntary Disclosure Programs.
What Should You Do?
Recent closure and liquidation of foreign accounts will not remove your exposure for non-disclosure as the IRS will be securing bank information for the last eight years. Additionally, as a result of the account closure and distribution of funds being reported in normal banking channels, this will elevate your chances of being selected for investigation by the IRS. For those taxpayers who have submitted delinquent FBAR’s and amended tax returns without applying for amnesty (referred to as a “quiet disclosure”), the IRS has blocked the processing of these returns and flagged these taxpayers for further investigation. You should also expect that the IRS will use such conduct to show willfulness by the taxpayer to justify the maximum punishment.
We encourage taxpayers who are concerned about their undisclosed offshore accounts or who have unreported crypto currency transactions to come in voluntarily before learning that the U.S. is investigating the bank or banks where they hold accounts. By then, it will be too late to avoid criminal prosecution or programs with reduced civil penalties. Protect yourself from excessive fines and possible jail time. Let the tax attorneys of 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 elsewhere in California help ensure that you are in compliance with federal tax laws. Additionally, if you are involved in cannabis, check out what a cannabis tax attorney can do for you. And if you are involved in crypto currency, check out what a bitcoin tax attorney can do for you.