Scarinci Hollenbeck, LLC
The Firm
201-896-4100 info@sh-law.comAuthor: Scarinci Hollenbeck, LLC|April 12, 2018
When filing their taxes, U.S. citizens must report worldwide income from all sources, including foreign accounts, and pay taxes on income from those accounts at their individual rates. While there are numerous legitimate reasons for holding offshore accounts, U.S. taxpayers may not use offshore accounts, such as foreign bank and securities accounts as well as trusts, to avoid U.S. tax liabilities.
In most cases, affected taxpayers need to fill out and attach Schedule B to their tax returns. Part III of Schedule B asks about the existence of foreign accounts and usually requires U.S. citizens to report the country in which each account is located. Certain taxpayers may also have to fill out and attach to their return Form 8938, Statement of Foreign Financial Assets, if the aggregate value of those assets exceeds certain thresholds that vary depending on filing status and whether the taxpayer lives abroad. Additional filing requirements apply to those with foreign trusts.
Separately, taxpayers with foreign accounts whose aggregate value exceeds $10,000 any time during the year must file a Form 114, Report of Foreign Bank and Financial Accounts (FBAR). The FBAR is not filed with a federal tax return and must be filed by April 15th each year.
Failure to report the existence of offshore accounts or pay taxes on these accounts can lead to civil and criminal penalties. As described by the IRS, civil penalties may include, but are not limited to:
Taxpayers may also face underpayment and fraud penalties. Where an underpayment of tax, or a failure to file a tax return, is due to fraud, the taxpayer is liable for penalties that essentially amount to 75 percent of the unpaid tax. Failing to file a tax return may also result in a penalty of five percent of the balance due, plus an additional five percent for each month or fraction thereof during which the failure continues may be imposed. However, the penalty may not exceed 25 percent. In addition, if a taxpayer fails to pay the amount of tax shown on the return, he or she may be liable for a penalty of .5 percent of the amount of tax shown on the return, plus an additional .5 percent for each additional month or fraction thereof that the amount remains unpaid, not exceeding 25 percent. Taxpayers may also face an accuracy-related penalty on any underpayments, which, depending on the circumstances, may be 20 percent or 40 percent.
Taxpayers who fail to disclose and pay taxes on foreign assets may also face criminal prosecution. The potential criminal charges related to tax matters include tax evasion, filing a false return, and failure to file an income tax return. Willfully failing to file an FBAR and willfully filing a false FBAR are both violations that are subject to criminal penalties under 31 U.S.C. § 5322. Additional possible criminal charges include conspiracy to defraud the government with respect to claims (18 U.S.C. § 286) and conspiracy to commit offense or to defraud the United States (18 U.S.C. § 371).
In some case, the charges may result in significant fines and even prison time. A person convicted of tax evasion is subject to a prison term of up to five years and a fine of up to $250,000. Filing a false return subjects a person to a prison term of up to three years and a fine of up to $250,000. A person who fails to file a tax return is subject to a prison term of up to one year and a fine of up to $100,000. Failing to file an FBAR subjects a person to a prison term of up to ten years and criminal penalties of up to $500,000. A person convicted of conspiracy to defraud the government with respect to claims is subject to a prison term of up to not more than 10 years or a fine of up to $250,000. A person convicted of conspiracy to commit offense or to defraud the United States is subject to a prison term of not more than five years and a fine of up to $250,000.
Given the risk of significant penalties including criminal protection taxpayers who are concerned that their failure to report income, pay tax, and submit required information returns should consult with an experienced tax professional and legal counsel. In many cases, it may be advisable to take advantage of the OVDP program before it expires.
The Firm
201-896-4100 info@sh-law.comWhen filing their taxes, U.S. citizens must report worldwide income from all sources, including foreign accounts, and pay taxes on income from those accounts at their individual rates. While there are numerous legitimate reasons for holding offshore accounts, U.S. taxpayers may not use offshore accounts, such as foreign bank and securities accounts as well as trusts, to avoid U.S. tax liabilities.
In most cases, affected taxpayers need to fill out and attach Schedule B to their tax returns. Part III of Schedule B asks about the existence of foreign accounts and usually requires U.S. citizens to report the country in which each account is located. Certain taxpayers may also have to fill out and attach to their return Form 8938, Statement of Foreign Financial Assets, if the aggregate value of those assets exceeds certain thresholds that vary depending on filing status and whether the taxpayer lives abroad. Additional filing requirements apply to those with foreign trusts.
Separately, taxpayers with foreign accounts whose aggregate value exceeds $10,000 any time during the year must file a Form 114, Report of Foreign Bank and Financial Accounts (FBAR). The FBAR is not filed with a federal tax return and must be filed by April 15th each year.
Failure to report the existence of offshore accounts or pay taxes on these accounts can lead to civil and criminal penalties. As described by the IRS, civil penalties may include, but are not limited to:
Taxpayers may also face underpayment and fraud penalties. Where an underpayment of tax, or a failure to file a tax return, is due to fraud, the taxpayer is liable for penalties that essentially amount to 75 percent of the unpaid tax. Failing to file a tax return may also result in a penalty of five percent of the balance due, plus an additional five percent for each month or fraction thereof during which the failure continues may be imposed. However, the penalty may not exceed 25 percent. In addition, if a taxpayer fails to pay the amount of tax shown on the return, he or she may be liable for a penalty of .5 percent of the amount of tax shown on the return, plus an additional .5 percent for each additional month or fraction thereof that the amount remains unpaid, not exceeding 25 percent. Taxpayers may also face an accuracy-related penalty on any underpayments, which, depending on the circumstances, may be 20 percent or 40 percent.
Taxpayers who fail to disclose and pay taxes on foreign assets may also face criminal prosecution. The potential criminal charges related to tax matters include tax evasion, filing a false return, and failure to file an income tax return. Willfully failing to file an FBAR and willfully filing a false FBAR are both violations that are subject to criminal penalties under 31 U.S.C. § 5322. Additional possible criminal charges include conspiracy to defraud the government with respect to claims (18 U.S.C. § 286) and conspiracy to commit offense or to defraud the United States (18 U.S.C. § 371).
In some case, the charges may result in significant fines and even prison time. A person convicted of tax evasion is subject to a prison term of up to five years and a fine of up to $250,000. Filing a false return subjects a person to a prison term of up to three years and a fine of up to $250,000. A person who fails to file a tax return is subject to a prison term of up to one year and a fine of up to $100,000. Failing to file an FBAR subjects a person to a prison term of up to ten years and criminal penalties of up to $500,000. A person convicted of conspiracy to defraud the government with respect to claims is subject to a prison term of up to not more than 10 years or a fine of up to $250,000. A person convicted of conspiracy to commit offense or to defraud the United States is subject to a prison term of not more than five years and a fine of up to $250,000.
Given the risk of significant penalties including criminal protection taxpayers who are concerned that their failure to report income, pay tax, and submit required information returns should consult with an experienced tax professional and legal counsel. In many cases, it may be advisable to take advantage of the OVDP program before it expires.
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