Foreign income

New client prepared own returns for years. He is a US resident and has foreign rental income and a foreign bank account. He filed tax returns in his country of origin reporting the rental income but never put the rental income on his US tax returns. It does not come across as willful but I know I have limited privilege as to not disclose anything so I did not ask any further. He also indicated on schedule B that he did not have a foreign bank account. I have only had a few clients with unreported foreign income but in those cases no returns had been filed for any of the years with foreign income. I think the best thing to do is to send the client to an attorney first. Anyone dealt with this as well and what did you decided to do?

This sounds like a fairly typical SDOP submission with simply a 5% miscellaneous penalty. Many of us have prepared hundreds of similar multi-year filings. Naturally, however, if there is any suspicion of criminal behaviour or proceeds of crime one would want an attorney and preferably a Kovel letter.

With filing form 14654 the taxpayer declares that his omission wasn't willful, right? I don't want to play lawyer because I'm not a lawyer and cannot decide if the omission was willful. So the client has to decide that. If it's the last 3 years, then 2015, 2016 and 2017 will need to be amended, I assume. Or maybe not 2015 any longer? Fortunately, 2018 will be correct.

My understanding is that the penalty is based on the highest aggregate balance of foreign financial assets for the year with the highest balance in the foreign financial assets.

No requirement for you to prepare the 14654. The client can do this himself. It is not a tax return. In practice, all the 14654s we prepare are sent to the client with a letter discussing the issues in detail and including a recommendation that the client instructs a lawyer if the client is concerned about risk.

The 5% penalty is not exactly calculated as you describe. You may want to read closely the instructions on the IRS website.

Do you have link to the instructions? I downloaded the form but there are no instructions. The only instruction I can find is an hour long webinar with a transcript that is not entirely clear. So it sounds like it's the highest aggregate balance for the year that has the highest total. And then multiply that by 5%.

Many contributors - myself included - have filed hundreds of cases through the SFOP & SDOP. You are right to be cautious if this is not your experience. https://www.irs.gov/individuals/interna ... ted-states

Okay, I have referred client to attorney if he wanted attorney to review his statement. Now attorney wants to talk to me. Client apparently marked box on schedule B that he didn't have foreign bank accounts which he did. He also didn't file FBARs. I'm hesitant to talk to an attorney. Experience from other professionals points to attorneys selling "fear" which is evidenced by the enormous amount of LLCs set up in the past years for liability protection which in others' opinion could easily be mitigated by having adequate insurance. How bad is it that client marked the box that he didn't have foreign bank accounts? I assume you've dealt with this as well.

Could be bad. It was a false answer on a tax return signed under penalties of perjury.

Yes, but how bad? I have not dealt with this before, except once when a client answered the tax organizer question about foreign bank accounts with a "No foreign bank accounts" for years. Years later, the truth came out, they had foreign bank accounts and unreported foreign income. They left for a firm that was willing to mark the box on schedule B indicating that client had no foreign bank accounts. Fine with me.

Bad enough that it is good they now have an attorney.

Client is still working with attorney. We'll be amending the IRS returns. And also of course the state returns for California. Does anyone have any experience with if the state will go after more year than 3?