Options to Help US Taxpayers with Unreported Foreign Income or Accounts

March 23, 2014

Many US citizens with foreign financial interests feel stuck. They haven't been reporting all their income and accounts, and now they either have to wait for their foreign banks to report them to the IRS under FATCA, or to report themselves and face stiff penalties. Aren't there any better options? In fact, there are.

The IRS offers four options:

Situation Compliance Option

Taxpayers who have properly reported all taxable income but recently learned that he/she should have been filing FBARs in prior years to report a personal foreign bank account or to report signature authority over bank accounts owned by an employer.

Taxpayers who reported, and paid tax on, all their taxable income for prior years but did not file FBARs, should file the delinquent FBAR reports and attach a statement explaining why the reports are filed late.
The IRS will not impose a penalty for the failure to file the delinquent FBARs if there are no underreported tax liabilities and you have not previously been contacted regarding an income tax examination or a request for delinquent returns.

Taxpayers who only have certain delinquent information returns, but no tax due.

A taxpayer who has failed to file tax information returns, such as Form 5471 for controlled foreign corporations (CFCs) or Form 3520 for foreign trusts but who has reported, and paid tax on, all their taxable income with respect to all transactions related to the CFCs or foreign trusts, should file delinquent information returns with the appropriate service center according to the instructions for the form and attach a statement explaining why the information returns are filed late. The IRS will not impose a penalty for the failure to file the delinquent Forms 5471 and 3250 if there are no underreported tax liabilities and you have not previously been contacted regarding an income tax examination or a request for delinquent returns.

Non-resident U.S. taxpayers with delinquent returns with low risk factors (including tax owed less than $1,500/year).

Filing Compliance Procedures for Non-Resident U.S. Taxpayers- Streamlined Procedure
Non-resident U.S. taxpayers should file delinquent tax returns, including delinquent information returns, for the past three years; delinquent FBARs for the past six years; and additional required information regarding compliance risk.  Payment of any federal tax and interest due must accompany the submission. Request no FBAR penalty. This procedure is available for non-resident U.S. taxpayers who have resided outside of the U.S. since January 1, 2009, and who have not filed a U.S. tax return during the same period.

Taxpayers with undisclosed foreign accounts and unreported income.   

Offshore Voluntary Disclosure Program

Pay 20% accuracy-related penalty;

Pay failure to file penalties if applicable;

Pay failure to pay penalties if applicable;

Pay, in lieu of all other penalties that may apply to the undisclosed foreign assets and entities, including FBAR and offshore-related information return penalties and tax liabilities for years prior to the voluntary disclosure period, an offshore penalty, equal to 27.5% (or in limited cases 12.5% (taxpayers whose highest aggregate account balance is not higher than $75,000) or 5% (see below) of the highest aggregate balance in foreign bank accounts/entities or value of foreign assets during the period covered by the voluntary disclosure;

5% penalty in the following cases:

1. Taxpayers who meet all four of the following conditions: (a) did not open or cause the account to be opened (unless the bank required that a new account be opened, rather than allowing a change in ownership of an existing account, upon the death of the owner of the account); (b) have exercised minimal, infrequent contact with the account, for example, to request the account balance, or update accountholder information such as a change in address, contact person, or email address; (c) have, except for a withdrawal closing the account and transferring the funds to an account in the United States, not withdrawn more than $1,000 from the account in any year for which the taxpayer was non-compliant; and (d) can establish that all applicable U.S. taxes have been paid on funds deposited to the account (only account earnings have escaped U.S. taxation).

2.Taxpayers who are foreign residents and who were unaware they were U.S. citizens.

3. Taxpayers who are foreign residents and who meet all three of the following conditions for all of the years of their voluntary disclosure: (a) taxpayer resides in a foreign country; (b) taxpayer has made a good faith showing that he or she has timely complied with all tax reporting and payment requirements in the country of residency; and (c) taxpayer has $10,000 or less of U.S. source income each year. For these taxpayers only, the offshore penalty will not apply to non-financial assets, such as real property, business interests, or artworks, purchased with funds for which the taxpayer can establish that all applicable taxes have been paid, either in the U.S. or in the country of residence. This exception only applies if the income tax returns filed with the foreign tax authority included the offshore-related taxable income that was not reported on the U.S. tax return.


If the offshore penalty is unacceptable to a taxpayer, that taxpayer can decide to withdraw from or opt out of the program. Once made, this election is irrevocable. An opt out is an election made by a taxpayer to have his or her case handled under the standard audit process. This means no penalty on unreported assets, only on the FBAR accounts. FBAR mitigation guidelines should apply and minimize the FBAR penalty.