When it comes to IRS international reporting penalties for US Persons who are out of compliance FATCA (Foreign Account Tax Compliance Act) is the new kid on the block. From a US tax and reporting standpoint, the FATCA Form 8938 — which is the form filed by US taxpayers reporting specified foreign financial assets — did not come into existence until 2012 when it was required for reporting on the 2011 tax return. Unlike the FBAR , which is a close relative of Form 8938, this form is reported directly to the Internal Revenue Service and is part of the actual tax return that was filed. When it comes to Form 8938/FATCA penalties the IRS has ramped up penalties in the past few years on matters involving FATCA. Luckily for Taxpayers, since Form 8938 is still relatively new, the U.S. government may still send a soft letter before actually sending a penalty or audit notice on the Form 8938 issue. Let’s review the basics of the FATCA penalties.
A summary of the Form 8938 penalties as provided by the IRS:
Penalty for failure to disclose
(1) In general
If any individual fails to furnish the information described in subsection (c) with respect to any taxable year at the time and in the manner described in subsection (a), such person shall pay a penalty of $10,000.
(2) Increase in penalty
where failure continues after notification If any failure described in paragraph (1) continues for more than 90 days after the day on which the Secretary mails notice of such failure to the individual, such individual shall pay a penalty (in addition to the penalties under paragraph (1)) of $10,000 for each 30-day period (or fraction thereof) during which such failure continues after the expiration of such 90-day period.
The penalty imposed under this paragraph with respect to any failure shall not exceed $50,000.
Referring to the form 8938 instructions provides more insight into how penalties are issued and provides the following:
Penalties
You may be subject to penalties if you fail to timely file a correct Form 8938 or if you have an understatement of tax relating to an undisclosed specified foreign financial asset.
Failure-To-File Penalty
If you are required to file Form 8938 but do not file a complete and correct Form 8938 by the due date (including extensions), you may be subject to a penalty of $10,000.
Continuing Failure To File
If you do not file a correct and complete Form 8938 within 90 days after the IRS mails you a notice of the failure to file, you may be subject to an additional penalty of $10,000 for each 30-day period (or part of a period) during which you continue to fail to file Form 8938 after the 90-day period has expired. The maximum additional penalty for a continuing failure to file Form 8938 is $50,000.
Married Taxpayers Filing a Joint Income Tax Return
If you are married and you and your spouse file a joint income tax return, the failure-to-file penalties apply as if you and your spouse were a single person. Your and your spouse’s liability for all penalties is joint and several.
The IRS offers several programs that Taxpayers may qualify for to avoid, reduce, or abate penalties. Let’s look at some of the more common offshore tax and reporting programs.
The Streamlined Filing Compliance Procedures (SFCP) or ‘Streamlined Procedures’ is one of the most popular offshore disclosure options It is for taxpayers who are non-willful and not under audit. Depending on which program the taxpayer qualifies for they will be subjected to a 5% Title 26 miscellaneous offshore penalty (instead of other FBAR/FATCA penalties) or even possibly qualify for a penalty waiver.
The Streamlined Domestic Offshore Procedures (SDOP) are used for US residents. The program requires that taxpayers are non-willful, not currently under audit, and have previously filed their tax returns timely if they were required to file a tax return. Under this version of the program taxpayers may amend previously filed returns but not file original returns. Taxpayers are subject to a 5% penalty on the highest December 31st aggregate value of their unreported accounts and assets.
The Streamlined Foreign Offshore Procedures (SFOP) it’s for taxpayers who do not qualify as U.S. residents but are still required to file a Form 1040 or otherwise considered U.S. persons for tax purposes. Unlike the streamlined domestic version of the program, taxpayers may file original tax returns as well as avoid any penalties for undisclosed foreign accounts, assets, or investments.
For non-willful taxpayers do not have to amend their tax returns for unreported income and the only form they have to file is the FBAR, they may qualify for the Delinquent FBAR Submission Procedures (DFSP). Under the current version of the program, there are no penalties assessed to the taxpayer.
The Delinquent International Information Return Submission Procedures (DIIRSP) is similar to the Delinquent FBAR Submission Procedures except that it allows taxpayers to file other forms such as Form 3520 or Form 8938 . But, since November 2020, the IRS no longer grants Taxpayers an automatic penalty waiver under this version of the program.
Unlike all of the programs identified above, the IRS Voluntary Disclosure Program (VDP) is reserved for willful taxpayers. With VDP, Taxpayers pay significantly higher penalties for both the undisclosed assets along with the unreported income — but they do receive a closing letter and it will almost always avert any potential criminal repercussions for taxpayers. There was a previous offshoot of the program referred to as OVDP come up with that program was terminated in 2018 and now domestic and offshore submissions are made directly through the traditional VDP program.
Some taxpayers may be able to avoid having to go through the disclosure procedures if they can make a proactive or defensive Reasonable Cause (RC) submission. Technically, when the taxpayer can show reasonable cause then the IRS is not authorized to issue penalties, or if they were issued — the penalty should be abated.
A Quiet Disclosure is when the taxpayer tries to circumvent the required disclosure procedures and submit amended or original forms hoping to not be detected by the IRS. The IRS has made it clear that if they catch taxpayers and acquire disclosure they will go after them for both civil and criminal penalties if applicable. Taxpayers should be very cautious before considering a quiet disclosure, especially because many taxpayers would qualify for streamlined or delinquency procedures and avoid or minimize penalties — without having to commit this type of fraudulent submission.
Once a taxpayer missed the tax and reporting (such as FBAR and FATCA ) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, taxpayers should consider speaking with a Board-Certified Tax Law Specialist who specializes exclusively in these types of offshore disclosure matters.
In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties .
When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting , it can become overwhelming for taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting.
Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure.