If you have an interest in an offshore bank account or another type of foreign financial account, you may be required to file a yearly report for the account with the Department of Treasury. The penalties for not filing Form FinCEN 114 are costly, and if you have been putting off disclosing your foreign bank accounts to the IRS, you should be aware of the risks you face by continuing to hide your offshore accounts.
There can be both criminal and civil penalties for failing to satisfy your Foreign Bank Account Reporting (FBAR) requirements. Criminal penalties can include up to 5 years in prison and a $250,000 fine. The willful failure to file FBAR is also a felony that can result in the loss of your right to vote, revocation of professional licenses for attorneys, doctors, and other professionals, and deportation of green card holders.
Civil penalties for failure to file FBAR are also harsh. IRS guidelines state that it will not seek penalties above 100% of the highest balance of the taxpayer’s offshore accounts. If you can convince the IRS that your FBAR violation was not willful, the maximum penalty is $10,000 per violation. However, each account can be treated as a separate violation, which could potentially result in hundreds of thousands of dollars in fines.
Who Needs to File an FBAR?
The general rule is that all United States persons with interests in foreign financial accounts totaling over $10,000 in a given year must file an FBAR.
The term “United States persons” includes U.S. citizens, U.S. residents, corporations, partnerships, LLC’s, and trusts formed under the laws of the United States. Anyone who meets the “substantial presence” test of Internal Revenue Code Section 7701(b) is also considered a U.S. person for FBAR purposes, and therefore must file an FBAR.
It can be difficult to determine whether you have to file and FBAR, what the risks are, and what steps you should take to disclose your offshore bank accounts. The laws are complicated, and there are several options for disclosure, including a “noisy” disclosure or a quiet disclosure.
The onerous criminal and civil penalties pose a great risk to taxpayers who continue to hide their foreign accounts from the IRS. Take action now to reduce the risk of severe penalties and give yourself some peace of mind.