Thinking about joining Streamline OVDP? Think again. “All You May Need To Do Is File Your Delinquent FBARs”

Congress authorized the Form FinCEN 114 (“FBAR”) filing requirement, and the draconian penalty of 31 USC 5321(a)(5)(C) for willful failure to file an FBAR, to curb evasion of United States income tax by use of foreign accounts.  Intuitively, the 31 USC 5321(a)(5)(C) penalty ought not apply where the account owner owes no income tax on the account.  The Internal Revenue Service (“IRS”) has recently confirmed that indeed this is the case.
“Delinquent FBAR Submission Procedures,” published by the IRS on June 18, 2014, provides that taxpayers who do not need the Offshore Voluntary Disclosure Procedures  (“OVDP”), or the new Streamlined Filing Compliance Procedures, to file delinquent or amended income tax returns to report and pay additional tax, but who:

1.  have not filed a required FBAR,
2.  are not under civil audit or criminal investigation by the IRS, and
3.  have not already been contacted by the IRS concerning delinquent FBARs,
should file their delinquent FBARs according to the electronic FBAR filing procedures, including a statement of why the FBARs are filed late.  There is a dropdown box of explanations for late filing on the FBAR form; the most likely explanation is, “I did not know I had to file.”
Delinquent FBAR Submission Procedures continues, “The IRS will not impose a penalty for the failure to file the delinquent FBARs if you properly reported on your U.S. tax returns, and paid all tax on, the income from the foreign accounts reported on the delinquent FBARs and you have not been previously contacted regarding an income tax examination or a request for the delinquent returns for the years for which the delinquent FBARs are submitted.”


Delinquent FBAR Submission Procedures adds, “FBARs will not automatically be subject to audit but may be selected for audit through the existing audit selection processes  that are in place for any tax or information returns.”
Thus, if a taxpayer owes no income tax on his foreign accounts, and he is not under civil audit or criminal investigation by the IRS, and he has not already been contacted by the IRS concerning delinquent FBARs, he should not make a submission to the IRS under the OVDP or the Streamlined Procedures.  All he needs do to comply with the law is file his delinquent FBARs.
There are many reasons why a taxpayer may owe no income tax on his foreign accounts.  The taxpayer may have reported income from the accounts on his income tax returns.  Or the accounts may have not generated any income.
It is also possible that the assessment statute of limitations has expired on income generated by the account.   For example, assume that Taxpayer had a Swiss account, but closed it in 2010, and has not had a foreign account since.  Taxpayer has not filed an FBAR for the Swiss account.   The income tax assessment statute of limitations is 3 years, and it begins to run from the time the tax is assessed.  Tax is assessed upon the filing of an income tax return, or later upon audit.  A 2010 income tax return was due to be filed on April 15, 2011, but may have been extended to October 15, 2011, and of course may have been filed late.   If  more than 3 years have passed since Taxpayer filed his 2010 income tax return,  and he has paid all income tax was assessed against him,  then he could owe no income tax for any year before 2011.
It is true that there is no assessment  statute of limitations where the taxpayer has committed fraud.  But the IRS has the burden of proving fraud, by clear and convincing evidence.  Fraud requires proof that the client knew and understood the law, and deliberately failed to follow it.  Fraud also requires an element of deceit, dishonesty, or evil motive.  We would never presume that a client has committed fraud.  There is no evidence that Taxpayer in our example has committed fraud.
The statute of limitations on assessment of an FBAR penalty is 6 years, and it begins to run on the filing date of the FBAR–the June 30 succeeding the calendar year of the FBAR.
Thus, all Taxpayer in our example needs do to fully comply with the law is file his 2008 and 2009 FBARs.  He should not enter OVDP or the Streamlined Procedures, amend any income tax returns, or pay any additional income tax, penalty or interest.  He owes no FBAR penalty.
We see Taxpayer’s factual scenario time and again.  In one case, the taxpayer came to us after a Wall Street law firm had placed him into the OVDP (and charged him a substantial retainer).  After persuading the taxpayer that he did not belong in the OVDP, and that all he needed to do was file his delinquent FBARs, (it was not easy so persuading him), we had the client file his delinquent FBARs, and then wrote to the IRS on his behalf withdrawing his OVDP submission.
In another case, notwithstanding our efforts to persuade the client that all he needed to do to comply with the law was file his delinquent FBARs, the  client insisted that we make a submission for him in the Streamlined Procedures.  As the client directed,  we filed the client’s delinquent FBARs, and paid the five percent FBAR penalty for him under the Streamlined Procedures.  Not long after, an IRS representative called us and said that the client was not a candidate  for the Streamlined Procedures; all the client needed to do was file his delinquent FBARs, which he had already done.  The IRS deposited the client’s check, and credited it to his 2013 income tax account.  After reviewing an account transcript of the client’s 2013 income tax account and confirming that the payment has been credited to it, we will file a claim for refund for the client for the credit balance.

The OVDP is punitive, and dissuades compliance with the law.  The IRS’ recent pronouncements concerning foreign accounts are designed to be less punitive, and encourage compliance.  They evince sound judgment at the IRS.
Many clients have difficulty accepting that all he they need do to fully comply with the law is file their delinquent FBARs.  Hopefully this post will help persuade them.
 http://www.forbes.com/sites/stephendunn/2014/07/20/all-you-need-to-do-is-file-your-delinquent-fbars/