If you have offshore bank accounts, the reality of FATCA should be less mystery and more common knowledge. Short for the Foreign Account Tax Compliance Act, FATCA is the legislation behind the government’s ability to find your funds anywhere in the world and, subsequently, bring down punitive actions against those not following the rules. Bottom line? If you have a foreign bank account, whether you live in the U.S. or not, you need to report it to the Internal Revenue Service.

Reporting Requirements for Foreign Bank Accounts

The IRS isn’t content with simply taxing its residents and citizens on income earned within the United States. Instead, they are committed to a more comprehensive approach: if you earn income in any way, anywhere (from Antarctica to the Fiji islands) it must be reported. This, of course, includes the interest income generated by your foreign bank accounts, as trivial as it might be. Even if you don’t receive a Form 1099 from your bank, all interest is reportable and the presence of a foreign bank must be declared to the IRS as well, by checking the applicable box on Schedule B of your tax return. If your assets are substantial, you may also have to file Form 8938 with your tax return. Those with at least $10,000 in a foreign bank account are also obligated to file an FBAR, also known as FinCEN 114.

Under FATCA, a majority of foreign banks will take special care to notify U.S. customers as to inquiries by the government, leading to an increased level of information shared between financial institutions and the IRS. If this information isn’t in sync with what you report – or if you choose not to report anything at all – you may find yourself in hot water.

Legal Ramifications for Failing to File

In general, making a few mistakes on your tax return leads to an IRS notice and a reassessed tax liability, not charges of fraud and tax evasion. However, ignoring foreign bank accounts can come with far more serious penalties than simple interest charges.

• Failure to report income can lead to an accuracy-related penalty of 25% or a civil fraud penalty of 75%
• Filing to file an FBAR non-wilfully can carry a civil penalty of $10,000 per instance
• Failing to file an FBAR wilfully can yield a penalty of the higher of $100,000 or 50% of the amount in relevant off-shore accounts
• Failing to file an FBAR can also come with criminal penalties, including $500,000 in fines and up to 10 years in prison
• Filing a false tax return has no statute of limitations and can carry a penalty of five years in prison and a fine of up to $250,000

Getting Back Into the Government’s Good Graces

If you forgot to file an FBAR or forgot to check the box on your taxes or have been ignoring inquiries from your foreign bank, you may be panicking right now, picturing orange jumpsuits and a cell waiting for you in a federal penitentiary. However, there are some steps you can take to redeem yourself in the eyes of the government. Known as amnesty programs, these processes are designed to bring you up to date on filings without risking more serious consequences.

Historically, the Offshore Voluntary Disclosure Program has been the most popular option, providing a somewhat bulletproof, no-questions-asked approach to amnesty. The fees are quite high – OVDP requires payment of back taxes and penalties up to 27.5% – but the shield against criminal or civil prosecution is beloved indeed. However,  this program is coming to an end on September 28th, 2018, leading to a major uptick in participants before the clock runs out.

This leaves one major pathway remaining: the Streamlined option. Available for those who maintain that a failure to file was not willful or done in order to evade authorities, this alternative provides a streamlined way (hence the name) to file amended or delinquent returns as well as offering terms for resolving tax liability and penalties. The largest difference between Streamlined and OVDP concerns a risk of legal actions; those going through the Streamlined Program are at risk for potentially facing legal consequences, while OVDP protects against this.

Currently, Streamlined amnesty comes in two forms: Streamlined Domestic and Streamlined Foreign. The Streamlined Foreign option is for those who do not reside in the U.S. who are up to date on all past tax filings and who qualify as non-willful. Unlike OVDP, there are no monetary penalties outside of interest and fees associated with incorrect tax returns, saving taxpayers potentially thousands. Streamlined Domestic, on the other hand, exists for those currently residing in the U.S. who are deemed to be non-willful and are up to date on all past tax filings. This program does differ in one key way from the foreign pathway, however: there is a 5% fee assessed on the annual aggregate value of offshore unreported balances.

Those overwhelmed by the road to amnesty may choose to instead perform what is known as a quiet disclosure, filing belated FBARs and amended tax returns on the sly, but this isn’t recommended. Things like amended returns can raise red flags at the IRS, making it more likely your prior mistakes will be noticed, not less. The IRS promises harsh penalties if these kinds of actions arise on their radar, but some filers feel it’s better than nothing.

It’s easier to jump through the government’s hoops than it is to fail to file and scramble for amnesty later, but there’s no changing the past. If you’re facing the prospect of penalties related to ignoring the IRS’ rules, understanding your amnesty options is a big part of getting back on the right foot before the government comes to call.