United States taxpayers have an obligation report their interest in any foreign financial accounts with regard to the balances in those accounts. If the aggregate balance of all such accounts exceeds $10,000 at any point during the year then you are also required to file a Foreign Bank Account Report (FBAR).
Despite this legal requirement, many taxpayers do not file required FBARs. Some may be unaware of the requirement, particularly if they are not a U.S. citizen, but are required to file a tax return because they are “green card” holders or have been substantially present in the United States. Other violations may be less excusable, or—as the IRS designates them— “willful”.
If you have undisclosed foreign financial accounts, you should consult with a tax attorney with FBAR experience, determine your exposure to risk, and select a course of action to minimize that risk.
The Risks of FBAR Non-Compliance
Just reading about the FBAR penalties should convince you to call a tax attorney. The penalties are:
- $12,459 per violation for non-willful violations that are not due to reasonable cause
- The greater of $124,588 or 50 percent of the balance in the account at the time of the violation, for each willful violation
- Criminal penalties of up to $250,000, or 5 years in jail, or both
To make matters worse, each account can be considered a separate violation for each year you failed to file an FBAR. These penalties can quickly add up into the hundreds of thousands of dollars, even for non-willful violations.
Fortunately, the IRS has designed several disclosure methods to both encourage taxpayers to report their foreign accounts and mitigate the risks of severe penalties.
The Disclosure Options
The Offshore Voluntary Disclosure Program (OVDP) has the steepest costs of any disclosure method because it is designed for willful FBAR violations. The “Offshore in-lieu” penalty of 27.5 percent of the highest aggregate account balance can be a big price to pay, but may be worth it to avoid even bigger penalties for FBAR non-compliance. In addition, you face a 20 percent accuracy-related penalty, plus interest on this penalty and the underlying tax.
The Streamlined Filing Compliance Procedures can be used for non-willful violations, and have much lower penalties. A miscellaneous offshore penalty of 5 percent will be charged to U.S. residents. This penalty is waived for taxpayers residing outside the United States.
You can also choose to simply submit your delinquent FBARs along with a statement explain why you are late filing them. If you reported ALL of the income from your foreign accounts on your tax return, but did not file an FBAR, this method can be used to come into compliance without facing any penalties. But keep in mind that this will not solve your problems if you failed to file various foreign information reporting forms such as the IRS Form 8938.
Before you attempt any of these disclosure options, you will need to know whether your FBAR violations are likely willful or non-willful, what the costs will be for each disclosure method, and whether you have a reasonable cause for your failure to file FBARs. A tax attorney with FBAR experience can help you answer these questions.
To learn more, download our free report on the Streamlined Filing Compliance Procedures.