5 Things You Should do if You have Unreported Foreign Income
Learn about what to do if you have unreported foreign income and accounts. Non-Compliance with foreign asset reporting can lead to some hefty penalties such as:
- Failure to file FBAR: $10,000 for eacah non-willful violation
- Failure to willfully file FBAR: the greater of $100,000 or 50% of the account’s highest balance
- Failure to file Form 8938: $10,000 for each violation; an additional $10,000 for each 30 days of non-compliance after receiving a notice from the IRS regarding your failure to report
- Penalty of 40% of your underpayment of tax resulting from undisclosed foreign financial assets; if the underpayment of tax is due to fraud, then the penalty is 75% of the tax on the unreported income
If that looks scary, that’s exactly what the IRS intended! These penalties are high enough to convince those with unreported foreign income and accounts to voluntary report them. Perhaps you just recently found out about the foreign reporting requirements or maybe you’ve known for a while but put it off. What are the first things you should do to protect yourself if you have unreported foreign income?
- DETERMINE IF YOU HAVE UNREPORTED FOREIGN INCOME. If you have unreported foreign assets but no unreported foreign income, you can simply file your delinquent FBARs.
- TALK TO A QUALIFIED ATTORNEY. While most will not require attorney-client privilege, it’s a good idea to speak to an attorney rather than your CPA or accountant regarding any unreported overseas accounts or assets. Your communications with an attorney are attorney-client privileged. Your attorney cannot be forced to provide information that is covered under this privilege. Federal law does not recognize an accountant-client privilege. As such, your accountant could be forced to testify against you or provide incriminating evidence.
- FILE YOUR FBARs. After you’ve chosen your attorney, the first thing the attorney should do is immediately file the FBARs. The tax returns will likely take some time, depending on the complexity. However, FBARs can be filed immediately. This reduces your exposure to FBAR penalties. As a practical matter, the IRS does not assess penalties on late-filed FBARs, but it does on FBARs that are not filed at the time the IRS discovers the non-compliance.
- GATHER FOREIGN ACCOUNT STATEMENTS. You’ll likely need to gather account statements for several years. While you are choosing your attorney, you should get a head start by gathering financial account statements. You’ll need to get 6 years of statements for streamlined offshore compliance procedures and 8 years for OVDP cases. This is often the hardest part for clients.
- DON’T PANIC AND STOP RESEARCHING. Many clients have convinced themselves that they’ve committed a serious tax crime, which is almost never the case. The more you continue to read about FBAR violations, the more you will confuse and worry yourself. It’s a perplexing area of tax where there aren’t always clear-cut guidelines. It’s important to work with a tax attorney to help you get through the process.