The Departments of Justice and Treasury have joined forces to crack down on the failure to report foreign accounts and income. They are utilizing the Internal Revenue Service, FinCEN, and the United States Attorney General’s office in a collaborative effort to target individuals, banks, foreign financial institutions, and countries who don’t comply with FATCA and the U.S. tax laws. As their effort has proved profitable with $6.5 billion dollars of collected revenue, more assets have been allocated to allow Justice and Treasury to expand upon their success. In addition, FATCA and other new laws with enhanced penalties have come into play giving the noncompliant taxpayer, financial institution or country greater incentive to come forward before they become the target of an investigation which very well could lead to criminal prosecution or greater civil penalties. Each delinquent filing or noncompliance is considered separately under the law, and carries its own repercussions. There are several consequences for not participating in streamlined OVDP that taxpayers need to be aware of. Here are the highlights.
Penalties Outside IRS Streamlined OVDP – Failure to complete Schedule B truthfully
We have already discussed the “issues” that surround section III of schedule B. It is conceivable that a taxpayer might complete the form inaccurately simply because of the confusing nature of the questions. An unintentional error in completion will not excuse a taxpayer. The failure to accurately complete schedule B does not necessary carry an independent monetary penalty beyond the payment of taxes, penalty and interest on the unreported income. However, if a taxpayer is found to have willfully answered the questions falsely they could be exposed to criminal penalties such as tax evasion, perjury and obstruction charges.
Penalties Outside IRS Streamlined OVDP – Failure to file IRS Form 8938
The failure to file IRS form 8938, the statement of foreign assets, carries an initial fine of up to $10,000. After the IRS has put the taxpayer on notice of the failure to disclose and file, the penalty becomes a potential additional $10,000 for every thirty days the form is not filed with a maximum potential penalty of $60,000.00. In addition, the taxpayer could be exposed to criminal charges for tax evasion, perjury and obstruction of justice.
Penalties Outside IRS Streamlined OVDP – Failure to file IRS form 3520
Unless a taxpayer can demonstrate that there was reasonable cause not to file Form 3520 in a timely manner, or if the information is incomplete or incorrect a fine may be imposed.  The reasonable cause standard applied to form 3520 is different. The taxpayer must be able to demonstrate that it was not willful neglect. The fact that a foreign country would impose penalties for disclosing the required information is not reasonable cause not to report under the IRS regulations. The penalties are broken out as follows:
Section 6677. A penalty generally applies if Form 3520 is not timely filed or if the information is incomplete or incorrect. Generally, the initial penalty is equal to the greater of $10,000 or:
- 35% of the gross value of any property transferred to a foreign trust for failure by a U.S. transferor to report the creation of or transfer to a foreign trust or
- 35% of the gross value of the distributions received from a foreign trust for failure by a U.S. person to report receipt of the distribution or
- 5% of the gross value of the portion of the trust’s assets treated as owned by a U.S. person for failure by the U.S. person to report the U.S. owner information.
- Additional penalties will be imposed if the noncompliance continues after the IRS mails a notice of failure to comply with the required reporting.
Section 6039F. In the case of a failure to report foreign gifts described in section 6039F, a penalty equal to 5% of the amount of such foreign gifts applies for each month for which the failure to report continues (not to exceed a total of 25%). No penalty will be imposed if the taxpayer can demonstrate that the failure to comply was due to reasonable cause and not willful neglect. See section 6039F for additional information.
Section 6662(j). Penalties may be imposed under section 6662(j) for undisclosed foreign financial asset understatements. No penalty will be imposed with respect to any portion of an underpayment if the taxpayer can demonstrate that the failure to comply was due to reasonable cause with respect to such portion of the underpayment and the taxpayer acted in good faith with respect to such portion of the underpayment.
Have more questions about the streamlined OVDP process? Please contact our office today.
 Internal Revenue Service Instructions for Form 8938. http://www.irs.gov/pub/irs-pdf/i8938.pdf
 Internal Revenue Service Instructions for From 3520. http://search.irs.gov/search?q=3520&output=xml_no_dtd&proxystylesheet=irs_portals_frontend&client=irs_portals_frontend&oe=UTF-8&ie=UTF-8&num=10&ud=1&exclude_apps=1&site=default_collection&numgm=5&requiredfields=-archive%3A1