FBAR Late Filing Penalty – FAQ Summary of Penalties for Un-Filed FBAR Forms
- 1 FBAR Penalties – The Basics
- 2 FBAR – When do I File the FBAR?
- 3 What are Penalties for Failing to Report the FBAR?
- 4 Unreported Foreign Income (Willful)
- 5 Getting Into FBAR Compliance
- 6 What are my options?
- 7 IRS Offshore Voluntary Disclosure
- 8 When Do I Need to Use Voluntary Disclosure?
- 9 Golding & Golding – Offshore Disclosure
- 10 The Devil is in the Details…
- 11 What if You Never Report the Money?
- 12 Getting into Compliance
With the New Year approaching, it may be the best time to start the year with a clean slate, get your FBAR Forms prepared, and perform all the necessary IRS FBAR Filing and Reporting for prior and current years in order to bring your undisclosed offshore/foreign accounts into compliance with the U.S. government.
As highly experienced International Tax Lawyers who handle numerous (Simple-to-Complex) FBAR filings, we can confirm that there are very heavy fines and penalties associated with not filing an annual FBAR (FinCEN 114 Report of Foreign Bank and Financial Accounts).
In fact, the penalties can range as high as 100% value of the foreign/offshore account in a multi-year audit, in which the U.S. government believes you were willful (aka acted intentionally, deliberately, intentionally, or with reckless disregard in failing to file the form).
In addition, with the implementation of FATCA (Foreign Account Tax Compliance Act) there are more than 100 countries that have entered into agreements or agreements substance with the United States. Moreover, tens of thousands of foreign financial institutions have agreed to report US account holders to the IRS/US government.
FBAR Penalties – The Basics
In recent years, the Internal Revenue Service has made enforcing international tax reporting a key priority. Each year, the IRS publishes the dirty dozen tax scan list, and for as far back as we can remember, offshore tax evasion has always been identified on the list.
The way the IRS sees it, is that there are billions if not trillions of dollars of unreported foreign income and foreign accounts which is being underreported to the United States. Whether or not you believe in the U.S. tax system, paying tax on foreign earnings, or reporting foreign money to the U.S. government is a good law – it is the law. And, the failure to follow the law may result in significant fines and penalties.
As such, if you meet the threshold requirement for filing an annual FBAR Statement, it is important that you get into compliance before it is too late (aka the IRS discovers your foreign accounts and penalizes you before you had a chance to voluntarily comply)
While not everybody will be penalized, foreign individuals, estates and businesses that are penalized may be hit with fines ranging from a warning letter in lieu of penalty all the way up to 100% penalty in a multiyear audit/willfulness scenario.
FBAR – When do I File the FBAR?
The FBAR (Report of Foreign Bank and Financial Accounts aka FinCEN 114) is a requirement for each individual that meets the threshold requirements for filing the form. The threshold requirements for having to file the form are relatively low. A person is required to file the FBAR if he or she has ownership, joint ownership, or signature authority over foreign/offshore accounts, which when totaled (not each individual accounts, but aggregating all the accounts) have an annual aggregate total that exceeds $10,000 on any given day during the year.
It does not matter whether the money was only in your account for a few days, and it does not matter if the money is your money or just in an account under your name – what matters is that you have ownership, joint ownership or signature authority over foreign accounts that on any day of the year, exceeds $10,000.
What are Penalties for Failing to Report the FBAR?
The penalties are tough. They range as follows:
Unreported Foreign Income (Non-Willful):
If a taxpayer’s failure to file the FBAR was non-willful, then chances are the taxpayer may be in a position to have a reduction or elimination of penalties. If the taxpayer was non-willful, then that means the taxpayer did have any intent, malice or fraud in failing to comply with FBAR filing requirements — rather, the taxpayer is simply unaware of the requirement to file the FBAR.
Presuming that there was additional income from overseas that the taxpayer did not report and the taxpayer was under examination before the taxpayer had an opportunity to enter the IRS streamlined program, there are four levels of penalties that the IRS could issue:
The IRS has the authority to waive penalties and instead issue a warning letter.
The IRS has the authority to issue one $10,000 penalty for all the accounts during the entire audit period.
$10,000 Annual Penalty
The IRS has the ability to issue a $10,000 penalty for each year that the taxpayer did not file and FBAR. For example, if the audit period is three years, then the IRS could issue penalties in the amount of $30,000.
$10,000 per account/per year
If the IRS agent wants to – even though the taxpayer was non-willful – if the circumstances require it the IRS agent can penalize the taxpayer $10,000 per account, per year for the entire audit period.
**This is one of the key reasons why it is important that a taxpayer does not speak directly with the Internal Revenue Service regarding these types of international tax issues and retains an experience international tax lawyer.
Unreported Foreign Income (Willful)
If a person’s failure to file the FBAR was willful, which generally means intentional — the stakes are much higher, and the penalties are much more severe. If a person intentionally failed to file their FBAR, it generally means they also intentionally failed to report their offshore income – which is a form of tax evasion and tax fraud.
The United States taxes individuals on their worldwide income; that means the United States does not care where you earned your income at or if it is not the type of income which is taxed in the source country, you must pay tax on it. For example, if you reside in the United States and earn $10,000 overseas in interest income (even if it was earned in a country that does not tax passive income) you are still required to pay tax on that money in the United States.
*Although, if you already paid tax in a foreign country already you may be entitled to a Foreign Tax Credit.
**In addition, if you sold a home in a foreign country and earn long-term capital gain or short-term capital gain, even if you do not have to pay capital gains in the foreign country, you have to report it on your US tax return as well. The intentional failure to report can have very serious consequences.
Getting Into FBAR Compliance
Unfortunately, with all the bad press out there and scare mongering about doing jail or prison time, you may be unnecessarily scared to report your foreign accounts-but that shouldn’t be the case. As long as you retain an experienced offshore voluntary disclosure lawyer to assist you, getting to compliance should be painless and seamless process.
What are my options?
For most individuals, businesses, or states, the best strategy is to enter one of the approved IRS offshore voluntary disclosure programs. The process is described below:
IRS Offshore Voluntary Disclosure
Offshore Voluntary Disclosure Tax law is very complex. There are many aspects that go into any particular tax calculation, including the legal status, marital status, business status and residence status of the taxpayer.
When Do I Need to Use Voluntary Disclosure?
Voluntary Disclosure is for individuals, estates, and businesses who are out of compliance with the IRS and Dept. of Treasury. What does that mean? It means that if you are required to file a U.S. tax return and you don’t do so timely, then you are out of compliance.
If the IRS discovers that you are out of compliance, you may become subject to extensive fines and penalties – ranging from a warning letter all the way up to tax liens, tax levies, seizures, and criminal investigations. To combat this, you can take the proactive approach and submit to Voluntary Disclosure.
Golding & Golding – Offshore Disclosure
At Golding & Golding, we limit our entire practice to offshore disclosure (IRS Voluntary Disclosure of Foreign and U.S. Assets). The term offshore disclosure is a bit of a misnomer, because the term “offshore” generally connotes visions of hiding money in secret places such as the Cayman Islands, Bahamas, Malta, or any other well-known tax haven jurisdiction – but that is not the case.
In fact, any money that is outside of the United States is considered to be offshore; the term offshore is not a bad word. In other words, merely because a person has money offshore (a.k.a. overseas or in a foreign country) does not mean that money is the result of ill-gotten gains or that the money is being “hidden.” It just means it is not in the United States. Many of our clients have assets and bank accounts in their homeland countries and these are considered offshore assets and offshore bank accounts.
The Devil is in the Details…
If you do have money offshore, then it is very important to ensure that the money has been properly reported to the U.S. government. In addition, it is also very important to ensure that if you are earning any foreign income from that offshore money, that the earnings are being reported on your U.S. tax return.
It does not matter whether your money is in a country that does not tax a particular category of income (for example, many Asian countries do not tax passive income). It also does not matter if you are a dual citizen and/or if that money has already been taxed in the foreign country.
Rather, the default position is that if you are required to file a U.S. tax return and you meet the minimum threshold requirements for filing a U.S. tax return, then you have to include all of your foreign income. If you already paid foreign tax on the income, you may qualify for a Foreign Tax Credit. In addition, if the income is earned income – as opposed to passive income – and you meet either the Bona-Fide Resident Test or Physical-Presence Test, then you may qualify for an exclusion of that income; nevertheless, the money must be included on your tax return.
What if You Never Report the Money?
If you are in the unfortunate position of having foreign money or specified foreign assets that should have been reported to the U.S. government, but which you have not reported — then you are in a bit of a predicament, which you will need to resolve before it is too late.
As we have indicated numerous times on our website, there are very unscrupulous CPAs, Attorneys, Accountants, and Tax Representatives who would like nothing more than to get you to part with all of your money by scaring you into believing you are automatically going to be arrested, jailed, or deported because you have unreported money. While that is most likely not the case (depending on the facts and circumstances of your specific situation), you may be subject to extremely high fines and penalties.
Moreover, if you knowingly or willfully hid your foreign accounts, foreign money, and offshore assets overseas, then you may become subject to even higher fines and penalties…as well as a criminal investigation by the special agents of the IRS and/or DOJ (Department of Justice).
Getting into Compliance
There are five main methods people/businesses use to get into compliance. Four of these methods are perfectly legitimate as long as you meet the requirements for the particular mechanism of disclosure. The fifth alternative, which is called a Quiet Disclosure a.k.a. Silent Disclosure a.k.a. Soft Disclosure, is ill-advised as it is illegal and very well may result in criminal prosecution.
We are going to provide a brief summary of each program below. We have also included links to the specific programs. If you are interested, we have also prepared very popular “FAQs from the Trenches” for FBAR, OVDP and Streamlined Disclosure reporting. Unlikes the technical jargon of the IRS FAQs, our FAQs are based on the hundreds of different types of issues we have handled over the many years that we have been practicing international tax law and offshore disclosure in particular.
After reading this webpage, we hope you develop a basic understanding of each offshore disclosure alternative and how it may benefit you to get into compliance. We do not recommend attempting to disclose the information yourself as you may become subject to an IRS investigation insofar as you will have to answer questions directly to the IRS, which you can avoid with an attorney representative.
If you retain an attorney, then you will get the benefit of the attorney-client privilege which provides confidentiality between you and your representative. With a CPA, there is a relatively small privilege which does provide some comfort, but the privilege is nowhere near as strong as the confidentiality privilege you enjoy with an attorney.
Since you will be dealing with the Internal Revenue Service and they are not known to play nice or fair – it is in your best interest to obtain an experienced Offshore Disclosure Attorney.
Call now; let us help you.