Foreign Bank Accounts, Cryptocurrency & the IRS: What U.S. Taxpayers Need to Know
The Internal Revenue Service (IRS) is cracking down on U.S. taxpayers who own foreign bank accounts and cryptocurrency in 2021. Both of these have been priority enforcement areas for the IRS in recent years, and the IRS has made clear that it intends to continue auditing and investigating taxpayers who it suspects of underreporting and underpaying their tax obligations related to offshore accounts and virtual currency transactions.
U.S. Federal Reporting Requirements for Foreign Bank Accounts
Federal Filing Requirements for Foreign Bank Accounts
With regard to foreign bank accounts, U.S. taxpayers potentially have two separate reporting obligations at the federal level. One of these obligations exists under the Foreign Account Tax Compliance Act (FATCA), and the other exists under the Bank Secrecy Act.
1. Filing IRS Form 8938 Under the Foreign Account Tax Compliance Act (FATCA)
Under FATCA, U.S. taxpayers have an obligation to report all “foreign financial assets” that exceed an aggregate threshold value. As of 2021, this aggregate threshold value is $50,000 at the end of the tax year for individual filers ($100,000 for joint filers), or $75,000 at any time during the tax year ($150,000 for joint filers).
As an aggregate threshold value, this takes into account all offshore accounts. So, for example, if you have three offshore accounts worth $45,000, $5,000, and $1,000 respectively at the end of the tax year, you must report all three accounts to the IRS. For most taxpayers, this involves filing IRS Form 8938, although other forms may be used in certain circumstances.
2. Filing an FBAR under the Bank Secrecy Act
In addition to filing under FATCA, many U.S. taxpayers who own offshore accounts must also file a Report of Foreign Bank and Financial Account (FBAR) with the Financial Crimes Enforcement Network (FinCEN). In fact, since the reporting threshold for FBARs is significantly lower than the threshold under FATCA, the FBAR filing requirement is actually much more common. Under the Bank Secrecy Act, U.S. taxpayers must report their “foreign financial accounts” to FinCEN if their accounts exceed $10,000 in aggregate value at any time during the tax year.
Potential Penalties for Failure to Report Offshore Accounts
Non-compliance with the foreign bank account reporting requirements under FATCA and the Bank Secrecy Act can lead to substantial penalties. Under FATCA, potential penalties include:
- $10,000 “failure to file” penalty
- $50,000 additional penalty for “continued failure” after IRS notification
- 40% penalty on underpaid tax owed on delinquent foreign bank account disclosures
Under the Bank Secrecy Act, failure to file an FBAR can potentially lead to criminal prosecution. In delinquent FBAR cases, U.S. taxpayers can face penalties including:
- Civil fines and penalties (varying based on whether violation was negligent, non-willful, or willful)
- Criminal fines (varying based on the circumstances involved)
- Up to 5 or 10 years of federal imprisonment
IRS Tax Obligations Pertaining to Cryptocurrency
In 2019, the IRS began sending warning (or “education”) letters to cryptocurrency investors. These letters explained cryptocurrency investors’ filing and payment obligations, and noted that investors could face substantial penalties if they failed to timely report gains and losses from their virtual currency transactions.
In the two years since the IRS began sending these letters, it has begun aggressively enforcing cryptocurrency investors’ obligations under the Internal Revenue Code. The IRS and its Criminal Investigation division (IRS-CI) have already conducted numerous audits and investigations, and they are relying on information from cryptocurrency exchanges to identify taxpayers who have not fully and accurately reported their transaction histories on their federal returns.
The potential consequences of failing to report cryptocurrency income to the IRS are the same as those for failing to report income from any other source. Audits and investigations are both very real possibilities, and taxpayers can potentially face civil enforcement action or criminal prosecution for federal tax evasion and tax fraud.
The Intersection of Foreign Bank Accounts and Cryptocurrency
Given that many cryptocurrency investors hold their digital assets overseas, there is significant overlap between many taxpayers’ offshore reporting obligations and their obligation to pay taxes on their cryptocurrency holdings. If a U.S. taxpayer holds cryptocurrency in an offshore account, and if the taxpayer’s offshore accounts exceed the aggregate threshold value for reporting under FATCA and/or the Bank Secrecy Act, then the taxpayer will likely have multiple filing obligations. Failure to meet any of these obligations can lead to an audit or investigation; and, if a taxpayer commits multiple violations, then the taxpayer could face multiple statutory charges.
Importantly, as of early 2021, the FBAR filing requirement only applies to offshore accounts that hold cryptocurrency and other assets. Under current federal regulations, a foreign account holding virtual currency exclusively does not qualify as a “reportable account” for purposes of Bank Secrecy Act compliance. However, FinCEN has issued a notice stating that it intends to update the Bank Secrecy Act regulations to cover cryptocurrency accounts, and this change could very well occur in 2021.
Here’s What to Do If . . .
Due to the potential for severe consequences as the result of failing to comply with the U.S. federal offshore account or cryptocurrency reporting requirements, all taxpayers need to undertake adequate measures to ensure compliance. For those who are delinquent on their filing obligations, addressing these delinquencies proactively will generally produce the most-favorable result. With this in mind, here’s what to do if . . .
You Have Failed to Report Your Offshore Accounts to the IRS or FinCEN
If you have failed to report your offshore accounts to the IRS or FinCEN, you have two primary options: (i) submitting a filing under the IRS’s Streamlined Filing Compliance Procedures, or (ii) submitting a “voluntary disclosure” under IRS-CI’s Voluntary Disclosure Practice.
The IRS’s Streamlined Filing Compliance Procedures are available to U.S. taxpayers who have committed “non-willful” federal tax law violations (even though taxpayers must file their FBARs with FinCEN, the IRS is responsible for enforcing taxpayers’ foreign financial account disclosure requirements). If you can certify that your non-disclosure was non-willful, then you may be able to submit a streamlined filing and mitigate any potential delinquency-related penalties.
IRS-CI’s Voluntary Disclosure Practice is an option for taxpayers who have willfully violated federal tax laws. Importantly, as IRS-CI explains, “voluntary disclosure will not automatically guarantee immunity from prosecution; however, a voluntary disclosure may result in prosecution not being recommended.” In order to qualify for protection under the Voluntary Disclosure Practice, a taxpayer must submit his or her voluntary disclosure before becoming the target of a federal tax audit or investigation.
You Have Failed to Report Your Cryptocurrency Income to the IRS
If you have failed to report your cryptocurrency income to the IRS, one option is to file an amended return. If you can correct your mistake with an amended return, this may be your most efficient and cost-effective solution. However, the IRS advises against so-called “quiet disclosures,” or including corrections for past years’ returns in the current year’s standard filing.
Another option if you have intentionally attempted to evade tax on your cryptocurrency gains is to utilize IRS-CI’s Voluntary Disclosure Practice. While the Streamlined Filing Compliance Procedures are specific to offshore reporting violations, the Voluntary Disclosure Practice is not. Again, however, taxpayers must proceed cautiously when making voluntary disclosures, and it is strongly advised that you consult with federal tax counsel prior to doing so.
You are Facing an IRS Audit or IRS-CI Investigation
If you are currently facing an IRS audit or IRS-CI investigation, then your situation is very different. Making a streamlined filing or voluntary disclosure is no longer an option. Instead, you must focus on defending yourself during the IRS’s inquiry—and on resolving the audit or investigation without the imposition of unnecessary interest or penalties.
As mentioned above, foreign bank account and cryptocurrency reporting are both priority enforcement areas for the IRS and IRS-CI in 2021. As a result, audits and investigations targeting reporting violations in these areas present particularly high risks. These audits and investigations are not likely to simply “go away,” and taxpayers will need to defend themselves effectively in order to avoid potentially-severe consequences.
Is the IRS or IRS-CI looking into your offshore accounts or cryptocurrency transaction history (or both)? If so, you should:
- Collect all relevant offshore account and/or cryptocurrency account records
- Collect any other records you have pertaining to your cryptocurrency transaction history (if relevant)
- Collect all relevant tax returns and other filings
- Be extremely careful about what you say to IRS or IRS-CI agents
- Avoid voluntarily providing any information that could lead to prosecution
- Engage an experienced federal tax controversy lawyer promptly
Discuss Your Situation with a Federal Tax Controversy Lawyer at Oberheiden P.C.
At Oberheiden P.C., our federal tax controversy lawyers are experienced in dealing with matters involving the IRS and IRS-CI. Several of our lawyers are former federal white-collar prosecutors, and we also have a former IRS-CI Special Agent available to consult with our clients. To discuss your situation in confidence, call 888-680-1745, or contact us online and a member of our firm will be in touch promptly.
Dr. Nick Oberheiden, founder of Oberheiden P.C., focuses his litigation practice on white-collar criminal defense, government investigations, SEC & FCPA enforcement, and commercial litigation.