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Time running out on tax amnesty Manafort case highlights resulting sting of FBAR penalties

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An often-misunderstood IRS reporting requirement known as Report of Foreign Bank and Financial Accounts has gained a lot of publicity since Paul Manafort was convicted of bank and tax fraud and other illegal activities.

Among the charges, prosecutors alleged that President Trump’s former campaign chairman violated FBAR regulations by failing to report more than $65 million in foreign accounts as part of a scheme to avoid paying taxes on lucrative offshore consulting fees.

Even innocent small business owners and others can get swept up under the broad sweep of FBAR filing requirements, according to some experts. And an amnesty program that could let a good-faith violator off the hook with minor penalties is expiring Sept. 28.

Most U.S. taxpayers who have a financial interest in or signature authority over a foreign financial account — including a bank account, brokerage account, mutual fund or trust that exceeds $10,000 — are required to report the account every year to the Department of Treasury by filing an FBAR, according to the IRS. Failure to do so can mean heavy penalties of up to $100,000 per account and up to 10 years in jail.

“You don’t have to be extremely wealthy to get caught up in this,” warned Steven Holt, a member of the law firm Mandelbaum Salsburg PC and chair of the taxation and trusts and estates departments. “Most of the time, people subject to FBAR filing are well-off, with a net worth of more than $1 million, but they could also be individuals of modest means, including a recent immigrant or someone with family overseas.”

There seem to be a lot of them. In 2015 alone, according to the most recent available data, the Treasury Department’s Financial Crimes Enforcement Network received a record number of FBARs, nearly 1.2 million, which was an increase of more than 8 percent from the prior year.

“From our client base at least, most FBAR filers have dual citizenship, or they’re recent citizens, or executives with permanent resident status,” Holt added. “The common thread is that many of them started overseas and then came to the U.S. Some may have owned an overseas bank account, or have an interest in a family account, or they may have inherited one.”

Either way, he said, many people don’t realize they have to report the account to the IRS, especially if they’ve already paid taxes on it to an overseas jurisdiction. Since 2009, however, under the offshore voluntary disclosure incentive program, these so-called innocent violators could “come forward and disclose foreign bank and other financial accounts and receive immunity from civil and criminal prosecutions,” although they’re subject to steep financial penalties, according to an NJCPA article written by Holt and Alan L. Glazner, who serves as of counsel at Mandelbaum Salsburg.

Under that amnesty program, which expires this month, “taxpayers are required to file eight years of amended tax returns and delinquent FBARs. The amended returns must include the undisclosed earnings from the foreign accounts,” according to Holt and Glazner. “In addition to the unpaid taxes due and the normal penalties for late payment, there is an additional miscellaneous penalty equal to 27.5 percent of the highest aggregate balance in the unreported foreign accounts during the eight-year period,” and the penalty could rise to 50 percent under certain circumstances.

Since 2009, more than 56,000 taxpayers have used the OVDI and another amnesty program to comply voluntarily, according to a March IRS announcement. “All told, those taxpayers paid a total of $11.1 billion in back taxes, interest and penalties,” the agency noted.

“The FBAR reporting requirement does not just apply to foreign bank accounts,” added Holt and Glazner. “Insurance policies, securities, artwork, real estate, patents and stock in foreign companies must all be disclosed and valued.”

One amnesty door may be closing, but another remains open, at least for now, observed Vinay Navani, a shareholder at the accounting and consulting firm Wilkin & Guttenplan PC. “The Streamlined Domestic Offshore Procedures typically carries a much lower penalty, but under it the taxpayer must demonstrate that the violation was not willful.”

Most of his FBAR amnesty clients are immigrants, he said. “The U.S. is one of the few countries that impose a tax on worldwide income,” he noted, adding the bite may be reduced by tax treaties and credits for taxes paid to overseas jurisdictions. “But a lot of people just don’t know that they’re required to file an FBAR. A lot of times it may be people with a moderate amount of wealth (family income of $150,000) who immigrate to the U.S., or ones who inherited an overseas account or they work for a foreign company that issued stock options.”

He’s currently advising a brother and sister who discovered, as they were settling their father’s estate, that he had neglected to file an FBAR and pay taxes on an overseas account for more than a decade. “Their father, who moved to the U.S. from overseas and became a U.S. citizen, didn’t know he had to file and pay the U.S. taxes,” according to Navani. “I recently suggested that they pursue the Streamlined Domestic Offshore Procedures because I believe they’ll be able to meet the non-willful bar.”

Of course the IRS isn’t just waiting for people to confess to failing to file an FBAR. The agency “will continue to use tools besides voluntary disclosure to combat offshore tax avoidance, including taxpayer education, whistleblower leads, civil examination and criminal prosecution,” the agency warned in March. “Since 2009, 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.”

Added Don Fort, chief, IRS Criminal Investigation: “The IRS remains actively engaged in ferreting out the identities of those with undisclosed foreign accounts with the use of information resources and increased data analytics. Stopping offshore tax noncompliance remains a top priority of the IRS.”

There’s nothing wrong or inherently criminal with having an overseas bank account, added Navani. “Just remember to treat it no differently than a local bank account. Report it on your tax return and, if necessary, file an FBAR.”

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