Discussion Archives:FBAR: Silent Filing vs. Voluntary Disclosure

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Discussion Forum Index --> Advanced Tax Questions --> FBAR: Silent Filing vs. Voluntary Disclosure


Discussion Forum Index --> Tax Questions --> FBAR: Silent Filing vs. Voluntary Disclosure

Ns (talk|edits) said:

9 November 2010
One of my new clients owns a UBS account in zwitzerland for about 10 years. The average balance is about $500K per year. This client lives abroad and has not filed returns nor FBARs in the last 10 years. Although I have not yet received the UBS statements, my understanding is that he probably would not owe any tax in the U.S. even after including his foreign income in the returns. The client asserts that he was not aware of the filing requirements.

My question is the following: Assuming no tax is due, would it be possible to do a "silent filing" (filing returns and FBARS plus a brief explanatory statement, with no penalties expected) instead of going through the traditional voluntary disclosure program? Does anyone have any experience dealing with these kinds of situations?

The following excerpt comes from the IRS website - Voluntary Disclosure FAQ (http://www.irs.gov/newsroom/article/0,,id=210027,00.html):

Q9. 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 the voluntary disclosure practice to correct this?

A9. The purpose for the voluntary disclosure practice is to provide a way for taxpayers who did not report taxable income in the past to voluntarily come forward 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. Send copies of the delinquent FBARs, together with copies of tax returns for all relevant years, by September 23, 2009, to the Philadelphia Offshore Identification Unit at:

Internal Revenue Service 11501 Roosevelt Blvd. South Bldg., Room 2002 Philadelphia, PA 19154 Attn: Charlie Judge, Offshore Unit, DP S-611

The IRS will not impose a penalty for the failure to file the FBARs.

Marcilio (talk|edits) said:

10 November 2010
Ns, have your client contact a tax attorney IMMEDIATELY. This is a criminal tax evasion issue. Period.

Non-filed FBARs related to UBS are being pursued by the Department of Justice although IRS is handling the program administratively.

If you Google FBAR and UBS, you can get an idea of the seriousness of this matter.

If you need a referral, contact me. Do not attempt to do this on your own.

Joanmcq (talk|edits) said:

11 November 2010
I have a client who also lives abroad and failed to file the FBARs, as well as returns. No UBS, but accounts for a controlled corp were over the 10K. He filed the 2009 FBAR, and has filed back returns to 2004, including the 5471s. Should he file the back FBARs under voluntary disclosure or do a 'silent filing'?

Skassel (talk|edits) said:

11 November 2010
If they do the voluntary disclosure, they WILL be hit with the 20% penalty for each and every year.

Todundsteuer (talk|edits) said:

11 November 2010
Ns.

Your client appears to be a very common problem that I see every day: a US citizen residing overseas who is a long-term non-filer.

Contrary to Marcilio's histrionics, these people are NOT on the IRS's target list for criminal prosecution for misdeeds of any kind whether they be Tax or FuBAR related.

Nor is there much likelihood that your client's possession of a UBS account will change that. When the US and CH entered into their UBS disclosure agreement on 19 August 2009, there was an annex to their agreement that set forth the criteria for account disclosure by UBS. By agreement that annex was to remain confidential under after the October 15, 2009 deadline for participating in the VD program triggered by the UBS scandal.

The annex has now been publicly disclosed and it reveals that accounts held by US individuals not domiciled in the USA (i.e. the address on the account was outside the USA) - regardless of the amount - would not be selected for disclosure by UBS. So if your guy's address on his UBS account was outside the USA and he didn't use a sham trust or corporation to hide behind, there is little likelihood your guy will get discovered as a result of the UBS disclosure agreement with the IRS.

Nor has your client made any past false representations on Schedule B denying owning a foreign account.

In the eyes of the IRS he's just a garden-variety overseas non-filer and in the old days (BU - Before UBS) it would be a simple problem: just file the back returns and FuBARs, pay the taxes and penalties and go and sin no more.

All that has seemingly changed by the IRS's handling of the UBS VD program.

The IRS has not exactly covered itself with glory by its insistance on giving the same sledge hammer treatmenat to everyone who signed up for their UBS VD program. Small-time tax and FuBAR delinquents who should never have been in the VD program in the first place got treated with the same brutality that was deserved only by the really bad actors in the program who had good reason to fear criminal prosecution. This undifferentiated cruelty exhibited by the IRS has severely damaged the credibility of its long-standing "informal" VD program that took it years to develop with practitioners. Unless the IRS does some damage control, loss of that informal VD program's credibility will ultimately cost the US Treasury far more than whatever short-term benefit they're getting out of the UBS VD program.

Your client's hesitation to just file his returns, pay his taxes, penalties and fees and get back into the system is a good example of what the IRS "feeding frenzy" induced by the UBS case has cost the IRS.

My guess - and it is just a guess - is that, institutionally, the IRS still regards your guy as just a non-filer and will pay him little or no criminal attention if he just files his last 6 years of returns or as far back as the first year in which he actually owed no tax. Indeed, the IRS may be interested in sending an olive branch to the tax practitioner community that things are just as they were BU.

I would not, however, be confident that your guy owes no taxes. If he had an income sufficient to have built up a $500K kitty at UBS it would surprise me if he did not have some past residual AMT exposure (FTC for AMT for years prior to 1.1.2005 was limited to 90%). Also, foreign governments tax capital gains and other investment income considerably differently than the USA if at all. And, last but not least: many US citizens living overseas "go native" in their attitudes towards reporting their taxable investment income to their host governments, i.e. he may never have paid enough foreign taxes to cover his US taxes on the same income. And then, of course, there are the inevitable PFIC's in the portfolio for which he will likely get tagged for deferred taxes and interest under ยง1291 et seq. . . . .These can rarely be offset by the FTC.

My instinct would be to tell the guy to file his past returns, pay his taxes, penalties and interest without any "explanatory notes"; file his FuBARs and go and sin no more. Yeah, he may have a few restless nights thinking about life in Club Fed but that's just too bad. But, after all, you're not a real American until you've done jail time. So tell him to suck it up and be a man.

Nor would I worry much about late-filed FuBARs. The IRS knows (or should know by now) that the enhanced FuBAR penalties introduced by the 2004 JOBS Act are of dubious constitutionality (e.g. 8th Amendment prohibition against "excessive fines"). Consequently, it is highly unlikely they will attempt to enforce anything but the mildest FuBAR penalties where there has not been an agreement by the taxpayer to "voluntarily" submit to them as in the UBS VD program.

In my opinion, the validity of the factual justification offered for the 40-year existence of FuBAR, has never been convincingly demonstrated by anyone much less the Treasury Secretary who originated it back in 1970. It is my guess that Treasury would be happy to abolish it - once they finish bludgeoning their UBS VD "clients" with it. Now that "Son of FuBAR" (Form 8938) is waiting in the wings, they won't have to file a lawsuit to collect the penalties for non disclosure of this useless information; they'll just take it.

Lizzit (talk|edits) said:

11 November 2010
I agree with Todundsteuer; the penalties for FBARs are dubious because they are probably unconstitutional. Because the FBAR penalties aren't likely to be assessed, let alone stick, I'd use the "quiet" disclosure route rather than the "voluntary disclosure" route. File the six (or fewer if no balance due in early years) back years, pay back tax, beg for a Waiver of Penalties Under Reasonable Cause for all penalties over $1000 (don't kill yourself over small potatoes), pay interest, and keep current from now on.

I disagree with Marcillo. The failure to file FBARs is a civil offense, not a criminal one. It's clearly written into the FBAR instructions, in fact, it's what gives it teeth now over the criminal penalties it used to carry some five or ten years ago.

JonF (talk|edits) said:

21 April 2011
The failure to file FBARs is a civil offense, not a criminal one. It's clearly written into the FBAR instructions, in fact, it's what gives it teeth now over the criminal penalties it used to carry some five or ten years ago.

This is flat out wrong and appallingly so. Failure to file FBARs (or filing incorrect FBARs) is both a civil offense and a criminal one. The criminal penalties remain, but the civil penalties have been ratcheted up after 2004. Anyone who has been paying any attention to the DoJ prosecution of UBS (and other offshore bank) customers, as well as the IRS voluntary disclosure initiative from 2009 (since the previous response was posted before the 2011 initiative) should know that. The IRS FAQ (for both initiatives) explicitly mention criminal penalties. It would be pretty rare for an FBAR only criminal prosecution to be asserted -- normally, it would be part of several charges including tax evasion, tax fraud, conspiracy etc., but it is very definitely possible for criminal penalties to be assessed. Frankly, any professional who specializes in filing returns for US citizens abroad who doesn't know that is very close to demonstrating professional incompetence since said professional apparently hasn't followed any of the IRS OVDI news from 2010.

The fullbore FBAR penalties may be unconstitutional (50% of bank balance for each of 6 years, for a total of around 300% of account), but 50% of highest balance for the last 6 years has been asserted and paid multiple times in prosecutions.

As far as quiet disclosure goes, that may have been an option in 2010 after the last initiative expired. It is no longer an option according to the IRS. Certainly a whole bunch of delinquent FBARs turning up would generate some attention. If taxes have been paid on the income(note that the IRS wants you to report the account income and claim credits against foreign taxes if you have account income), then according to the IRS you have reasonable cause. Otherwise, I don't know, and I don't think anyone outside the government knows. For small accounts, I would guess the IRS would pay little attention, or may assess some civil penalties. For larger accounts, civil penalties are likely. Criminal penalties are very unlikely unless the IRS already has your name.

But the key point to remember: The government is very serious about enforcing FBAR rules. FBAR violations are technically a criminal violation and civil penalties are draconian. And with FATCA next year, its going to get worse.

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