Virginia State Bar

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Trusts and Estates

A Section of the Virginia State Bar.

Fall 2014 Newsletter

Newsletter - Trusts and Estates

Volume 22, No. 11

Navigating the Treacherous Task of Foreign Account Compliance
By Stephan J. Lipskis, Esq.

Alarming stories of penalty assessments,1 seizures of foreign accounts,2 and criminal prosecution3 have drastically increased awareness of foreign account reporting requirements for U.S. taxpayers. Concerns over prosecution and punishment for tax evasion previously associated with nefarious individuals and illicit organizations now affect U.S. taxpayers holding foreign accounts for legitimate reasons. Such concerns are further heightened due to the Foreign Account Tax Compliance Act (“FATCA”),4 which became law in 2010 and became effective this year. FATCA requires foreign financial institutions to report information on U.S. account holders, thus offering the Treasury Department a previously unavailable stream of information on foreign accounts held by U.S. taxpayers. This sea change in the Treasury Department’s ability to obtain information increases the need for individuals to domesticate their foreign accounts immediately.5

Determining the appropriate method of bringing an individual’s or entity’s foreign accounts into compliance requires careful analysis of a taxpayer’s entire foreign account history. The initial analysis of the taxpayer’s accounts determines the available means of compliance. This article addresses: (i) the required compliance for foreign accounts and several common types of non-compliance; (ii) the historical and current risk of non-compliance; (iii) the current compliance options; and (iv) the process for determining the appropriate option for bringing an unreported foreign account into compliance. Presently, account compliance may be achieved through the current iteration of the Offshore Voluntary Disclosure Program (“Current OVDP”), Streamlined Filing Compliance Procedure (“Streamlined Filing”), the Delinquent FBAR Procedure, and the Delinquent International Information Return Procedure.6 For purposes of this article, only the Current OVDP and Streamlined Filing are addressed in detail, because the Delinquent FBAR Procedure and the Delinquent International Information Return Procedure apply in very limited circumstances.

I. Basic Compliance Requirements for Foreign Account Holders

U.S. taxpayers are not in compliance with regard to foreign accounts when they fail to properly report foreign account income on their U.S. income tax return, fail to appropriately report the existence of an account, or fail to file necessary informational disclosures. The distinction of “U.S. Taxpayer” is significant because the foreign account compliance regime applies to all individuals with U.S. tax obligations, including U.S. citizens living abroad and resident aliens. Generally, proper foreign account compliance requires a foreign account holder to: (i) disclose the existence of foreign assets on IRS Form 1040, Schedule B; (ii) file Form 8938 “Statement of Specified Foreign Financial Assets” with the foreign account holder’s tax return; and (iii) file a “Report of Foreign Bank and Financial Accounts” (an “FBAR”) with the Treasury Department’s Financial Crimes Enforcement Network (“FinCEN”) where foreign accounts aggregate to $10,000 U.S. Dollars or more.7 Certain entities and individuals may have additional duties to file IRS Forms 3520, 8621, 8865, 5471, and 8891 with regard to gifts from foreign individuals, shareholder status in a Passive Foreign Investment Company (“PFIC”), interests in foreign partnerships, interests in any controlled foreign corporation (“CFC”), or status as a beneficiary of a Canadian Registered Retirement Plan, respectively, but a discussion of those filings is beyond the scope of this article.8

The FBAR filing requirement causes many foreign account non-compliance issues because of its low dollar threshold and a different filing deadline than income tax returns. Account holders and their tax professionals often miss the FBAR filing requirement due to lack of familiarity with foreign account reporting. An FBAR must be filed when a U.S. Taxpayer holds accounts with an aggregate balance of $10,000 or more at any point in a calendar year. Furthermore, the FBAR must be filed by June 30th. Unlike an individual’s income tax return, there is no opportunity for extension,9 which creates difficulties for individuals filing their income tax returns on extension in October.

Frequently, income tax is not properly reported on assets in foreign accounts due to reasons other than the desire to evade taxes. Differences between foreign and domestic accounting, lack of current account information, and complex foreign tax regimes confuse how much income should be reported, whether foreign tax payments offset tax due to the U.S. Treasury, and what class of income the foreign account generates. Such confusion may cause a U.S. Taxpayer to significantly underreport taxable income. In failing to properly report taxable income, taxpayers may be subject to an extension of the standard three-year period of limitation on assessment of taxes and penalties to a six-year period10 or an unlimited period.11 The six-year period of limitations is increasingly likely because the law was modified in 2010 to extend the assessment period to six years if a taxpayer fails to report “more than $5,000 in gross income from ‘specific foreign assets.’”12 Accordingly, tax non-compliance with regard to foreign accounts may result in a problem that looms over an individual perpetually.

II. General Risk of Being Non-Compliant and Foreign Account Investigation

The Treasury Department’s effort to identify noncompliant foreign account holders stems from a congressional desire to pursue criminals, terrorists, and tax cheats, that was reinforced by modification of the FBAR enforcement regime under the USA PATRIOT Act after the September 11, 2001 terrorist attacks.13 The USA PATRIOT Act requires periodic reports to Congress on FBAR enforcement and compliance efforts.14 The penalty regime was modified under the American Jobs Creation Act of 2004 (“Jobs Act”) on October 22, 2004.15 Prior to the USA PATRIOT Act, only willful violations were punishable and the corresponding penalties ranged between $25,000 and $100,000.16 The current penalty regime, which is discussed in Section III, applies to both willful and non willful violations.

Efforts to investigate violations of the FBAR reporting regime were bolstered by Congress’s creation of the IRS Whistleblower Office within the IRS Criminal Investigation Division (“CID”) in 2006. Pursuant to information obtained by CID regarding foreign financial institutions, many foreign financial institutions have negotiated the disclosure of accounts held by U.S. Taxpayers in return for immunity or reduced penalty assessments.17 Throughout this process of tracking down unreported foreign accounts, the IRS has offered opportunities for those with income from a legal source to bring accounts into compliance. Initially, such efforts were informal, but the creation of the Offshore Voluntary Disclosure Program in March of 2009 (“2009 OVDP”)18 formalized the process and offered a seven-month window for bringing accounts into compliance. The success of the 2009 OVDP led to a second window for compliance in the Offshore Voluntary Disclosure Initiative in 2011 (“2011 OVDI”),19 which was succeeded by the open ended Offshore Voluntary Disclosure Program in 2012 (“2012 OVDP”).20In June 2014, the 2012 OVDP became the Current OVDP21 after receiving significant updates due to pressure from taxpayer advocacy groups for improved avenues of compliance for foreign account holders whose non-compliance is non-willful.

The structure of the Current OVDP and Streamlined Filing demonstrates a favorable approach toward non willful cases, but offers opportunity even in the case of willful violations. Leniency toward non-willful violators of the FBAR regime should not be seen as a reason to forego compliance altogether, because FATCA reporting will certainly result in the U.S. government’s obtaining information about non-willful violators. Once the Treasury Department takes action against a taxpayer or the institution where the account is held, compliance options are either limited or unavailable. Furthermore, an assertion of non-willfulness becomes more difficult to defend once an account holder is aware of a need to comply and fails to take remedial actions with regard to past non-compliance. Most important, the Current OVDP and other means for compliance are not guaranteed.

III. Penalties for Non-Compliance and Determining the Degree of Non-Compliance

In the event non-compliance is addressed outside of the Current OVDP and other compliance regimes (e.g., if the Treasury investigates a non-compliant individual or the compliance programs are terminated), the stated penalties for non-compliance are daunting. Beyond potential tax liability and criminal penalties associated with having significant amounts of unreported taxable income, foreign financial account holders who have failed to file necessary FBARs risk a civil penalty of as much as 50% of the aggregate value of their foreign accounts, per year, if their failure to file is considered willful.22 An assessment of a willful penalty for failure to file an FBAR in multiple years will quickly cause the account holder to be subject to a liability much greater than that of the account balance. A non-willful failure to file carries a potential penalty of up to $10,000, per year.23

Historically, the IRS offered some leniency to certain taxpayers due to the discretionary nature of its authority,24 but this discretion has been refined and systematically stated in the most recent guidance to provide more predictable results.25 Importantly, the U.S. government has sought, and has been awarded, an FBAR penalty in excess of the entire account balance. 26 Accordingly, a proactive enrollment in an authorized compliance procedure is preferable to a “wait and see” approach to compliance.

IV. Current Compliance Regimes

The various compliance programs vary greatly in scope and complexity. If an account holder is involved in criminal activity or under current investigation by the IRS, the account holder will not qualify for any of the compliance regimes. Furthermore, failure to provide full information under any of the regimes risks further action by the IRS. Therefore, an account holder only exacerbates an already complex situation if all relevant facts are not revealed to the account holder’s attorney.

A. Current OVDP

Under the Current OVDP, a taxpayer must file eight years of FBARs, eight years of amended income tax returns, and pay an assessment of FBAR penalties equal to either 27.5% or 50% of the highest aggregate account balance over the eight-year disclosure period. Furthermore, account holders must provide full account statements, answer lengthy questionnaires for each account, and reconstruct historical basis data to determine tax liability. The upside of such complete disclosure is that the Current OVDP is available to individuals with accounts at institutions that are currently under investigation (at the 50% penalty rate for such accounts). Furthermore, statutory civil and criminal penalties are taken off the table once an individual is enrolled in the program. A final closing agreement is attained upon completion of the Current OVDP that states the final terms of the disclosure. Accordingly, the Current OVDP offers the most protection from future audit for individuals who qualify for enrollment compared to the other compliance regimes.

The Current OVDP is a lengthy process which is initiated when the taxpayer either files a preclearance fax or submits a Voluntary Disclosure Letter. A preclearance fax should always be submitted because it determines initial eligibility for the Current OVDP while not precluding the taxpayer from electing Streamlined Filing. Conversely, making a Streamlined Filing submission precludes entrance into the Current OVDP, and submitting a Voluntary Disclosure Letter precludes entry into the Streamlined Filing program27 and risks non-acceptance into the Current OVDP, if done before preclearance is granted.

A preclearance fax requires more information under the Current OVDP than it did under the 2012 OVDP. Specifically, the Current OVDP requires telephone numbers, names, and addresses of applicable foreign financial institutions, along with identifying information of all foreign and domestic entities through which the undisclosed assets were held by the taxpayer. 28The IRS attempts to answer all preclearance faxes within thirty days of submission. In the author’s experience, the timeline for their response is usually closer to two weeks, but requests made since the Current OVDP was instated have been delayed due to a high volume of submissions. Upon receipt of preclearance, a Voluntary Disclosure Letter must be submitted within 45 days.

The Voluntary Disclosure Letter is a questionnaire created by the IRS which requires the account holder to give detailed information on the foreign assets, associated individuals, and entities. The Voluntary Disclosure Letter is used to determine whether the individual is accepted into the Current OVDP. The individual will be notified of preliminary acceptance or denial to the Current OVDP after the Voluntary Disclosure Letter has been reviewed. If preliminarily accepted, a full voluntary disclosure package must be submitted within 90 days.

The voluntary disclosure submission requires: (i) amended income tax returns for the eight year period; (ii) appropriate consents to extend the statute of limitations on tax liability within the disclosure period; (iii) a penalty worksheet that states the account balances for each year of the disclosure and determines to which year the 27.5% or 50% penalty is applied; and (iv) other related documents such as corresponding powers of attorney and checks for tax liability and penalty amounts.

The extensiveness of the full submission creates urgency in the information gathering process. Extensions are available upon request, but filing a full and complete submission with the IRS within the 90-day period demonstrates that the individual is committed to the program and may maintain goodwill with the agent assigned to the case. Depending on the circumstances, compiling data for eight years on foreign financial accounts and taxes may be difficult or impossible. Accordingly, time should be budgeted carefully to ensure a full submission will be ready for the 90-day deadline. While full payment of taxes, interest, and penalties with the full submission is preferred, there is an opportunity to agree to a payment plan.

Upon receipt of the full submission, the IRS assigns the matter to an agent who will correspond with the taxpayer regarding any need for supplementary information. Once the review of the submission has been completed and the submission accepted in full, a closing agreement will be presented to the taxpayer. The taxpayer may opt-out of the Current OVDP at any time prior to signing the closing letter. Opting-out subjects the taxpayer to potential investigation by the IRS, and should be considered carefully to assess the risk associated with an investigation.

B. Streamlined Filing

The U.S. Treasury created Streamlined Filing this year to expand what were previously the 5% penalty regime29 and Non-Resident, Non-Filer regime under OVDP 2012.30 The former 5% penalty regime applied only to individuals who had minimal interaction with their account and required the same amount of documentation as the rest of the OVDP 2012 program. In fact, demonstrating the 5% penalty under the OVDP 2012 required significantly more detail to prove that an account holder’s minimal activity met the test. The former Non-Resident, Non-Filer regime required similar information and was likewise unduly burdensome. The Streamlined Filing reduces the documentation requirements under the predecessor subprograms of the 2012 OVDP, and creates a much simpler avenue for compliance than the full-fledged enrollment into the Current OVDP. Streamlined Filing is bifurcated into the categories of U.S. Taxpayers residing in the United States (“Resident Streamlined Filers”) and those residing outside of the United States (“Non- Resident Streamlined Filers”).31

Non-Resident Streamlined Filers are afforded an excellent avenue for compliance. An individual is considered a non-resident if, in any of the three most recent tax years: (i) the individual did not have a U.S. abode; and (ii) the individual was physically outside of the United States for 330 full days. By filing delinquent or amended income tax returns for three years, FBARs for six years, and a statement certifying foreign status and non-willfulness, the taxpayer will only be required to pay back taxes and related penalties and interest.32 Unlike the other programs discussed, the taxpayer does not have to pay an FBAR penalty.

Resident Streamlined Filers must file the same information as Non-Resident Streamlined Filers except the certification of non-willfulness omits the proof of foreign residence.33 In addition, the taxpayer is subject to a 5% FBAR penalty for the highest aggregate account balance over the six applicable years.34 In the event an FBAR was properly filed for any of the six years, such year is removed from the penalty calculation.

Under both of the Streamlined Filing procedures, the risk of audit is the same as any amended or delinquent income tax return.35 It is important to note that the taxpayer is providing information for unreported assets on FBARs for six years, but only filing amended returns for three years. Accordingly, the potential for pursuing an audit of income tax returns dating between four and six years prior to the submission should be carefully considered with regard to the amount of income that is unreported, if any, on such returns. In the event the taxpayer has significant unreported foreign source income in the four to six years prior to the submission, the Current OVDP process may offer a more comfortable compliance regime, despite the severe increase in associated penalties and tax.

V. Determining the Proper Means of Compliance

Once a noncompliant foreign account has been identified, several steps must be followed in assessing the account holder’s foreign account compliance options to determine the proper method. The basic categories of this information gathering are: Initial Eligibility; Factual Determinations; and Tax Exposure.

A. Initial Eligibility

In order to properly assess the compliance options, an advisor must determine whether any active investigations are underway and the extent of the individual’s foreign financial interests. First, the advisor should identify all foreign financial accounts owned by or under the control of the individual which should have been reported in the previous eight FBARs. Generally, a client comes to an advisor with one foreign account the client knows is non-compliant; however, the advisor must be clear that all foreign accounts are required to be brought into compliance.

Next, it must be determined if the account holder is under investigation by the IRS or a foreign tax authority, or if any accounts are held at a foreign financial institution currently under investigation by the IRS. A list of institutions under investigation is available at the IRS website.36

None of the compliance methods will be available if the account holder is currently under investigation. The account holder’s only option is to contest the highest aggregate account balance used to assess the FBAR penalties. If any of the institutions holding accounts are under investigation by the IRS, then the Current OVDP is the best option available for compliance and a 50% penalty will be applied (assuming the taxpayer is accepted into the Current OVDP). If neither the institutions nor the individual is subject to investigation, then many more compliance options potentially become available.

B. Factual Determinations

After determining initial eligibility for the compliance regimes by uncovering the location of an account and whether an investigation of an account is underway, an advisor should carefully question the individual about the circumstances surrounding the account. The IRS compliance efforts are largely geared towards catching individuals who are actively evading taxes and those individuals who assist such efforts. Accordingly, normal banking activity and individuals acting on their own volition to open and maintain accounts justifiably bear less scrutiny than those individuals who actively sought counsel in attempting to evade U.S. taxes via offshore accounts. As a result, details on how the account was set up, account management, and receipt of communications regarding the account are crucial. The facts gathered in this phase generally determine whether the Current OVDP’s liability mitigation makes it a preferable option despite the higher associated penalty. This process collects the information required for the Voluntary Disclosure Letter and Current OVDP submission, as well as the Certification Statement, if Streamlined Filing is an option. Furthermore, this step allows for a determination of whether an assertion of “non-willfulness” is viable.

If Initial Eligibility determines that the individual is ineligible for any compliance program, the Factual Investigation initiates the fact gathering necessary to challenge the IRS’s investigation into the individual as a “willful” violator of the FBAR reporting requirement. Relatively little case law addresses the willfulness of an individual’s conduct in failing to report financial assets and, unfortunately, that which does exist does not bode well for account holders. Accordingly, a practitioner should always educate a client on what conduct has been considered “willful” in previous decisions and what conduct is considered “willful” under the Current OVDP guidance, because many clients will cling steadfastly to their personal definition of willfulness. In United States v. Williams, the IRS won on appeal a finding of willfulness where a taxpayer failed to file an FBAR after having reached an agreement with the IRS regarding previous violations of foreign income reporting requirements.37 In Williams, the Fourth Circuit provided two inferential means of determining willfulness: a “willful blindness” standard and a “conscious effort to avoid learning about reporting requirements” standard.38 While each of those standards is helpful when discussing the account history with a client, the specific guidance provided in the compliance programs offers a clearer picture of the intended scope of the term “willfulness.”

C. Tax Exposure

In assessing which compliance method to use, the “tax tail” should not wag the dog. In fact, the penalty regime should likewise not be the primary consideration. The foremost concern in determining the proper compliance method is the individual’s comfort with potential liability. The Current OVDP offers the security of a written agreement with the IRS upon completion, but none of the other compliance methods offer similar solace. Accordingly, the information gathered in the Factual Determination step must be used to assess potential risks of future audit and investigation instead of limiting the assessment to simply compliance options. Often many avenues will be available, but risk assessment is the best determinant of the proper route. The penalty and tax implications of a choice between the Current OVDP and Streamlined Filing are significant. The former’s eight-year look back causes a potential for a significant increase in tax, interest, and penalties compared to the three-year look back under Streamlined Filing. Furthermore, the 22.5% difference in the respective penalty amounts creates additional incentive to choose Streamlined Filing, if it is an option. Accordingly, an assessment of the differences between the tax, interest, and penalties due under each of the programs may be instructive in cases where the Factual Determinations make that decision a close call. The individual’s comfort level with the individual’s choice is paramount because the Current OVDP is a long process and Streamlined Filing risks an audit of the submitted income tax returns.

VI. Conclusion

Unfortunately, many individuals who have been trapped in non-compliance are simply caught up in the United States’ overly complicated foreign tax and account reporting requirements. The potential for being reported under FATCA means those who have unreported accounts can no longer afford to ignore the problem. Fortunately, the available compliance programs offer a potential solution for taxpayers who are willing to confront the problem.

Stephan Lipskis is an associate practicing in the Virginia Beach office of Wolcott Rivers Gates. He received his B.A. from the University of Mary Washington and his J.D. from the University of South Carolina School of Law, where he served on the Honor Council as Vice-Chair. Mr. Lipskis focuses his practice on: tax disputes; estate planning; estate administration; and tax planning for individuals, charities, and businesses. Mr. Lipskis is a member of the Virginia Bar Association, the Norfolk-Portsmouth Bar Association, the Virginia Beach Bar Association, and is a current Board Member of the Hampton Roads Gift Planning Council.


1. See, e.g., Charles Rettig, Zwerner: Jury Determines 150% FBAR Penalty Applies - What Next?, FORBES, May 29, 2014,

2. See, e.g., Robert W. Wood, Credit Suisse Account Holders Face Search and Seizure, FORBES, July 14, 2012, http://www. face-search-and-seizure/.

3. See, e.g., Associated Press, Beanie Babies Creator H. Ty Warner Sentenced for Tax Evasion, ABC NEWS, Jan. 14, 2014,

4. I.R.C. §§ 1471–74.

5. See I.R.S., IRS Offshore Voluntary Disclosure Efforts Produce $6.5 Billion; 45,000 Taxpayers Participate, FS-2014-6, June 2014,$6.5-Billion;-45,000-Taxpayers-Participate (reporting over 45,000 voluntary disclosures between 2009 OVDI, 2011 OVDI, and 2012 OVDP) (last visited Nov. 20, 2014).

6. See I.R.S., Options Available For U.S. Taxpayers with Undisclosed Foreign Financial Assets, June, 2014, http://www. For-U-S--Taxpayers-with-Undisclosed-Foreign-Financial-Assets (last visited Nov. 20, 2014).

7. FinCEN Report 114, Report of Foreign Bank and Financial Accounts [hereinafter FBAR], Small-Businesses-&-Self-Employed/Report-of-Foreign-Bankand-Financial-Accounts-FBAR (last visited Nov. 20, 2014).

8. For specific guidance on these forms, visit

9. FBAR, supra note 7.

10. I.R.C. § 6501.

11. IRM

12. Robert W. Wood, Beware Longer IRS Statute of Limitations on Foreign Accounts, FORBES, May 14, 2012, http://

13. Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism (USA PATRIOT ACT) Act of 2001, Pub. L. No. 107-56, 115 Stat. 272 (2001).

14. See Hale E. Sheppard, Evolution of the FBAR: Where We are, and Why it Matters, 7 HOUSTON BUS. L. & TAX J. 1, 12 (2006).

15. Pub. L. No. 108-357, § 821, 118 Stat. 1418, 1586 (2004).

16. See Sheppard, supra note 14, at 12.

17. See John Letzing, et al., Credit Suisse Settlement with U.S. Could Top $800 Million, WALL ST. J., Jan. 22, 2014, http://

18. I.R.S., IRS Extends Deadline for Disclosing Hidden Offshore Accounts, IR-2009-84, Sept. 21, 2009, (last visited Nov. 20, 2014).

19. I.R.S., Second Special Voluntary Disclosure Initiative Opens; Those Hiding Assets Offshore Face Aug. 31 deadline, IR-2011-14, Feb. 8, 2011, Assets-Offshore-Face-Aug.-31-deadline.

20. I.R.S., IRS Offshore Programs Produce $4.4 Billion To Date for Nation’s Taxpayers; Offshore Voluntary Disclosure Program Reopens, IR-2012-5, Jan. 9, 2012,$4.4-Billion-To-Date-for-Nation%E2%80%99s-Taxpayers;-Offshore-Voluntary-Disclosure-Program-Reopens (last visited Nov 20, 2014).

21. FS-2014-6, supra note 5.

22. 31 U.S.C. §5321(a)(5)(A); IRM

23. 31 U.S.C. §5321(a)(5)(A); IRM

24. See Sheppard, supra note 14, at 23.

25. IR-2014-73 (June 18, 2014)

26. See United States v. Zwerner, No. 1:13-cv-22082-CMA (Fla. Dist. Ct., April 29, 2014).

27. See Current OVDP Frequently Asked Questions and Answers, # 12, Taxpayers/Offshore-Voluntary-Disclosure-Program-Frequently- Asked-Questions-and-Answers-2012-Revised [hereinafter OVDP FAQs] (last visited Nov. 16, 2014); see also Streamlined Filing Compliance Procedures, (last visited Nov. 20, 2014).

28. OVDP FAQs, supra note 27, #23.

29. See I.R.S., IRS Says Offshore Effort Tops $5 Billion, Announces New Details on the Voluntary Disclosure Program and Closing of Offshore Loophole, IR-2012-64, June 26, 2012,$5-Billion,-Announces-New-Details-on-the-Voluntary-Disclosure-Program-and-Closing-of-Offshore-Loophole (last visited Nov. 20, 2014).

30. 2012 OVDP Frequently Asked Questions and Answers, # 17, (last visited Nov. 20, 2014).

31. Streamlined Filing Compliance Procedures, supra note 27.

32. U.S. Taxpayers Residing Outside of the United States, (last visited Nov. 16, 2014).

33. See U.S. Taxpayers Residing in the United States, (last visited Nov. 20, 2014).

34. Id.

35. See id.; U.S. Taxpayers Residing Outside of the United States, supra note 32.


37. United States v. Williams, No. 10-2230, unpublished (4th Cir. July 20, 2012).

38. Id.