The Internal Revenue Service believes that there are millions of Americans who have failed to file FBARs; short for Report of Foreign Bank and Financial Accounts. Taxpayers with offshore holdings of $10,000 or more are required to report those holdings to the IRS. The duty to report includes people merely having signature authority over a foreign account.
IRS outreach efforts have been quite poor. Many dual nationals, expats who are living overseas and foreign born Americans simply don’t understand the FBAR filing requirements. Beginning in 2009, the IRS offered a variety of amnesty programs to help people come into compliance. The current program, called the Offshore Voluntary Disclosure Program (“OVDP”) allows participants to avoid audit and criminal prosecution and pay a one time 27.5% penalty based on the highest balance of the accounts. (Better deals may be available, however.)
Since 1999, 30,000 taxpayers took advantage of amnesty. As a result, the IRS collected an additional 5.5 billion in taxes and penalties. Amnesty isn’t the only way to come into compliance, however. Some taxpayers elected a traditional or “voluntary” disclosure. That involves sitting down with the IRS and explaining why FBARs were not filed timely. Although there are no guarantees with a traditional disclosure, those taxpayers that can prove their actions weren’t “willful” may get a better deal.
A third method of coming into compliance involves making a “quiet disclosure.” That is a fancy way of amending returns and filing any missing FBARs. The IRS makes it quite clear on its website that quiet disclosures can result in massive penalties. Despite these warnings, however, the government’s General Accounting Office says 10,000 taxpayers have made quiet disclosures.
Why? Good question.
The IRS is notoriously slow. Currently it is taking the IRS upwards of 500 days to clear some amnesty filings. That means the quiet disclosures are being pushed to the back burner. Some taxpayers probably hope that the IRS will simply forget or be unable to chase down all the quiet disclosure filers. Others may simply want to buy time and worry about penalties at some future date.