Reporting Foreign Bank Deposits and Foreign Assets

The Streamline Procedure  – Failure To Report Foreign Bank Deposits And Foreign Assets

The Offshore Voluntary Disclosure Program since September 28, 2018 is no longer available to U.S. taxpayers who have not reported their omitted foreign bank accounts and certain foreign assets. However, the Streamline Procedure, which applies only to those persons who have not willfully failed to report their foreign bank accounts, is still available.

Like the Offshore Voluntary Disclosure Program, the Streamline Program can be rescinded at any time, leaving the taxpayer who has not reported their foreign bank deposits at the mercy of the individual I.R.S. examiner.

The Streamline Program has received a big boost from a fairly recent case that has taken a very broad view of “willfulness” as it applies to the U.S. taxpayer that has not reported his or her foreign bank deposits.

Those who are interested in the Streamline Program need to take an extended look at the Bedrosian case. Several recent cases have chipped away at the favorable findings in Bedrosian.

The Bedrosian case exemplifies the facts necessary for a finding of non “willfulness”. The mental state required is proof that the defendant knew of a duty imposed on him or her by the law and that he or she voluntarily and intentionally violated that duty. It is necessary to find that a taxpayer meets this standard in order to hold the taxpayer responsible for the omission of an account in a foreign bank.

The court in Bedrosian stated that if the government proves the actual knowledge of the pertinent legal duty, that fact without more, satisfies the “knowledge” component of the willfulness of the defendant. If there is a good faith belief that a taxpayer was not violating any of the provisions of the tax laws, there is no willfulness.

The issue in the Bedrosian case was straightforward.

That issue was whether, based on all of the evidence, the I.R.S. could prove that a party was aware of the duty to report certain bank deposits. The Bedrosian court held that the taxpayer cannot be shown to have been a wrongdoer if there is a good faith misunderstanding and belief regarding what this duty was, whether or not the claimed belief or misunderstanding is objectively reasonable.

The Court commented as follows:

Congress passed the Bank Security Act in 1970 in order to target the problem on the “unavailability of foreign and domestic bank records of customers thought to be engaged in activities entailing criminal and civil liability.”

The Act was intended to require the maintenance of records and the making of certain reports which have a high degree of usefulness in criminal, tax, or regulatory investigations or proceedings. To that end, the Secretary of Treasury was granted authorization to promulgate regulations prescribing certain record keeping and reporting requirements for domestic banks as well as individuals. One such reporting requirement is the FBAR, which arises out of the mandate and its corresponding regulations that all US citizens must report on an annual basis to the IRS any “financial interest in, or signature or other authority over a bank, securities or other financial accounts in a foreign country”.

Failure to timely file an FBAR for each foreign financial account in which a taxpayer has an interest of over $10,000 results in exposure to a civil money penalty that varies depending on the taxpayer’s level of culpability.

The Internal Revenue Service provides mitigation guidelines for reducing the penalty that would otherwise be assessed against a taxpayer for violation of the FBAR requirements.

“It is clear that the intent behind the guidelines is to differentiate those individuals who have no criminal tax history or prior FBAR violations, who don’t sustain a fraud penalty, and who cooperate with the investigation from those who do not”.

It is a fine line that has to be met by many taxpayers who wish to avoid the “willfulness” label. However, for those who are truly innocent of a bad intent when they failed to report their foreign bank accounts, there still is much help and a clear path to avoiding the much more significant penalties of the “Offshore Disclosure Program”.

This article is posted with permission from U.S. Tax attorney Richard S, Lehman Esq.

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