The IRS is Closing In
The cold hard truth is that the IRS foreign income and asset detection net is closing in on those that have failed to make a voluntary disclosure to date. Taxpayers that fail to take advantage of this program run the risk of being detected by the IRS, at which point the program will no longer be available to them.
Increasingly, information regarding foreign activity is becoming available to the IRS through:
- Tax treaties with foreign nations
- Intelligence gathered from other voluntary disclosures
- Information gathered from paid informants and whistleblowers
- The imposition of the Foreign Account Tax Compliance Act (FATCA)
- Foreign Financial Asset Reporting under the new IRS form 8938, which is required with the filing of a taxpayer’s personal income tax return
An experienced FBAR lawyer can help you navigate the complicated process.
Publicity and Increased Risks
Heightened Public Awareness
The ever-increasing publicity concerning the IRS’s efforts to reduce the Tax Gap for income taxes evaded related to Foreign Accounts and Assets, coupled with the publicity surrounding the addition of form 8938 to the individual tax returns of U.S. citizens and residents, creates an ever-increasing risk that an out-of-compliance taxpayer’s non-compliance discovered by the taxing authorities will be viewed as purposeful and willful rather than merely negligent or even grossly negligent.
Rising Criminal Risks
The associated risk of facing criminal rather than civil consequences is also rising because only willful conduct can be criminally prosecuted. Keeping in mind that the difference between willful and negligent behavior is merely a state of mind, the IRS is increasingly becoming of the opinion that taxpayers could not conceivably have been ignorant about the requirement of filing an FBAR TDF 90-22.1 (FinCen 114) or reporting foreign income because of the 8938 requirement and the public notice surrounding the imposition of this form.
The Consequences of Non-Disclosure
Failing to acknowledge foreign income when expressly asked in question 7 of Part III on the Form 1040 schedule raises suspicion.
Non-compliant taxpayers should enter the 2012 OVDI program as soon as possible rather than face the possibility of defending a criminal charge which would largely focus on circumstantial evidence surrounding their state of mind at the time of their noncompliance.
An experienced attorney can provide critical guidance to help mitigate risks and ensure compliance.
Frequently Asked Questions
What is the IRS doing to detect unreported foreign income and assets?
The IRS is leveraging international tax treaties, whistleblower tips, the FATCA law, and reporting requirements like Form 8938 to uncover foreign income and assets that haven’t been disclosed. This intensifying scrutiny makes it harder for taxpayers to hide offshore financial activity.
Why is it risky to delay voluntary disclosure of foreign assets?
If the IRS detects noncompliance before a taxpayer comes forward voluntarily, the opportunity to enter programs like OVDI (Offshore Voluntary Disclosure Initiative) may no longer be available. This increases the chance of facing harsher penalties or criminal charges.
What is Form 8938 and why is it important?
Form 8938 is used to report specified foreign financial assets and must be filed with a taxpayer’s federal income tax return. Its existence increases the IRS’s ability to identify unreported foreign income, making noncompliance more difficult to justify.
What are the potential legal consequences of not disclosing foreign accounts?
Non-disclosure can result in severe civil penalties and even criminal charges if the IRS deems the noncompliance willful. Criminal prosecution is more likely when the taxpayer’s failure to report is seen as intentional.
How can an FBAR lawyer help in this situation?
An experienced FBAR lawyer can guide taxpayers through the complex disclosure process, help assess legal exposure, and work to mitigate penalties or avoid criminal liability altogether through timely compliance efforts.