Td f 90-22.1

[Questionguy101]

Discussion with a client revealed that he should have filed the TD F 90-22.1 for more than 10 years. He was very concerned and wanted to fix the problem. I suggested to have him file back the last 5 years plus the current year. He asked me if there is any potential penalty. I said he would probably be ok because there is no tax due in the TD F 90-22.1 and he voluntarily files back the past returns. But then after he has left, I did a little research and found out actually the penalty can be as high as $500,000 and 5 years of imprisonment. So was I incorrect to tell him that he would probably be ok? Now the thought of him receiving a $500,000 penalty bill or being sent to prison really worries me.

[Koss]

FBAR Penalties

Questionguy101 wrote:

Now the thought of him receiving a $500,000 penalty bill or being sent to prison really worries me.

Why does that worry you? It should worry him.

Okay, wait a minute... He doesn't know about it yet.

Was the guy accurately reporting all foreign source income? Were his regular tax returns filed on time? Has he paid any tax due?

In other words, is he otherwise in compliance?

If so, he should be okay.

I found this on an IRS FAQ about the Offshore Voluntary Disclosure Program:

- - - -
Q17. I have properly reported all my taxable income but I only recently learned that I should have been filing FBARs in prior years to report my personal foreign bank account or to report the fact that I have signature authority over bank accounts owned by my employer. May I come forward under this new program to correct this?

A17. The purpose for the voluntary disclosure practice is to provide a way for taxpayers who did not report taxable income in the past to come forward voluntarily and resolve their tax matters. Thus, if you reported, and paid tax on, all taxable income but did not file FBARs, do not use the voluntary disclosure process.

For taxpayers who reported, and paid tax on, all their taxable income for prior years but did not file FBARs, you should file the delinquent FBAR reports according to the instructions (send to Department of Treasury, Post Office Box 32621, Detroit, MI 48232-0621) and attach a statement explaining why the reports are filed late.

The IRS will not impose a penalty for the failure to file the delinquent FBARs if there are no underreported tax liabilities and you have not previously been contacted regarding an income tax examination or a request for delinquent returns.
- - - -

Here's the link:

http://www.irs.gov/Individuals/International-Taxpayers/Offshore-Voluntary-Disclosure-Program-Frequently-Asked-Questions-and-Answers

BMK

[joanmcq]

Go to the IRS website and look under OVDI. They want 6 years of back filings, and if he has reported all of the income during the years, the likelihood of penalties are small, and he can have reasonable cause for abatement.

If he's been hiding income, responding 'no' to the question about foreign bank accounts, not reporting income, he needs an attorney who specializes in this. Google Phil Hodgens.

[Questionguy101]

Based on what he said, there was a little interest income in 2006,2007,2008 and 2009, but there was no interest income in 2010 and 2011. Since his account balance was just over $10,000 USD, the amount of interest should not be much either. I guess it would be less than $300 in each of those years even after taking into consideration that the interest rate back then was higher. He has not reported this interest in his income tax return though.

As for the question in Schedule B, he has not answered it because Schedule B was not included in the tax returns in those years. So he has neither answered 'yes' nor 'no' to the question.

Thoughts?

[Koss]

Unreported Income

The failure to file the FBAR is one thing; failure to report the income on the foreign accounts is a very different matter.

If the unreported income was only a couple hundred dollars in interest each year, he may be able to avoid any serious penalties.

You'll want to take a very close look at everything you can find on the IRS website about the Offshore Voluntary Disclosure Program.

Why does he have a foreign bank account? Is there a legitimate business reason? Or personal, such as family/frequent visits to that country?

This matters. If his motive was to hide income or assets, then it's a very serious matter, even if the unreported income is a small amount. In reviewing his case, the IRS will look at all facts and circumstances to determine whether the guy made some honest mistakes, or whether he is now trying to undo something that was done with criminal intent.

Many, many people don't know about the FBAR filing requirement, and the IRS understands this. But why didn't he report the interest income?

Did he really think it wasn't taxable because the account was in a foreign country? Was he paying foreign tax on the interest income? If so, that provides a reasonable basis for his erroneous belief that it didn't have to be reported on his US tax return. And it might even mean that little or no tax is due, because he may be able to take the foreign tax credit on Form 1116.

The IRS is not interested in prosecuting people who really didn't understand the law, especially if there was no tax due.

You could start by preparing amended returns, just to see what the outcome is.

The scary part about the whole thing is this:

The question of whether your client was truly naive and simply made honest mistakes or whether he consciously intended to avoid taxes is highly subjective. While it may look very innocent to you or me, the IRS agent reviewing the case might come to a different conclusion, especially if the overall picture makes him skeptical. For example, if your client has rather high income--even if it was all reported, except for the foreign interest--and he has graduate level education, it may not seem credible that he really didn't know that he had to report foreign income.

Was he doing his own return? Or did he go to a tax pro? Did the tax pro ask him if he had a foreign bank account??

You may not want to ask him these questions.

If he answers these questions for you, and you are not an attorney, you may later be interviewed or subpoenaed by the IRS. At least in theory, the IRS could make you testify against your own client.

If he doesn't want to retain an attorney, then you need to explain to him that there is a possibility that the IRS could conduct a criminal investigation, and that any information he gives you is not protected by attorney-client privilege.

It doesn't sound like the kind of case the IRS would pursue. But you don't know what the client isn't telling you. And it may be better if it stays that way.

I know a tax attorney who would take this case. You can e-mail me if you want.

BMK

[joanmcq]

http://www.irs.gov/Individuals/International-Taxpayers/Offshore-Voluntary-Disclosure-Program-Frequently-Asked-Questions-and-Answers

pay particular attention to Question 17.

You might want to have him read it. And yes, he should see an attorney specializing in this. I agree with Koss that if the income was taxed in the foreign country, he may still qualify for abatement. They aren't looking for your client. But unfortunately he falls under this law.