The requirement to file an FBAR (Report of Foreign Bank and Financial Accounts) is different than the requirement to file a tax return. Generally, a person has to file a tax return when they meet a certain threshold income requirement that requires filing of the return. The requirement and threshold amounts vary based on a person’s age, marital status, and other particular issues such as whether they are blind or not.
Filing an FBAR is different. Prior to 2016, the FBAR was required to be filed by June 30 of the following year and there was no extensions given.
If you met the requirement to file an FBAR, then you are required to file it the form — even if you do not have to otherwise file a tax return.
When you file a tax return, you address it specifically to the Internal Revenue Service. When you submit an FBAR, it is submitted only electronically and to the Department of Treasury. The threshold requirement in filing an FBAR is that it is required to be filed by any person that has more than $10,000 in annual aggregate total in their that counts at any time during the year (exceptions apply).
The failure to file a timely FBAR (even though the due date(s) are changing for 2016 going forward) can have serious repercussions, including staggeringly high penalties as well as possible criminal investigation and prosecution for the failure to file the FBAR.
The following is a summary of FBAR Filing requirements:
If you, your family, your business, your foreign trust, and/or PFIC (Passive Foreign Investment Company) have more than $10,000 (in annual aggregate total at any time) overseas in foreign accounts and either have ownership or signatory authority over the account, it is important that you have an understanding of what you must do to maintain FBAR (Report of Foreign Bank and Financial Accounts) compliance. There are very strict FBAR filing guidelines and requirements in accordance with general IRS tax law, Department of Treasury (DOT) filing initiatives, and FATCA (Foreign Account Tax Compliance Act).
Filing FBARs and ensuring compliance with IRS International Tax Laws, Rules, and Regulations is extremely important for anyone, or any business that maintains:
- Foreign Bank Accounts
- Foreign Savings Accounts
- Foreign Investment Accounts
- Foreign Securities Accounts
- Foreign Mutual Funds
- Foreign Trusts
- Foreign Retirement Plans
- Foreign Business and/or Corporate Accounts
- Insurance Policies (including some Life Insurance)
- Foreign Accounts held in a CFC (Controlled Foreign Corporation); or
- Foreign Accounts held in a PFIC (Passive Foreign Investment Company)
Golding & Golding provides Foreign Account Reporting strategies for clients around the globe in order to report Foreign Bank Accounts and become FBAR compliant.
What is an FBAR?
In accordance with international tax law compliance, taxpayers who meet the threshold requirements are required to file an FBAR.
An FBAR is a “Report of Foreign Bank and Financial Accounts” form. It is a form that is filed online directly with the Department of Treasury. Unlike the tax return, the FBAR form must be filed by June 30th of the tax year and there are no extensions available for filing it late. If you attempt to file it late, there can be serious repercussions, including fines and penalties – since it is considered Quiet Disclosure or Silent Disclosure in an attempt to circumvent the OVDP or Streamlined Program rules and regulations.
**UPDATE: Starting in 2016 for Tax Year 2015 – filing of your 2015 FBAR will be in accordance with the same time periods to file your tax returns, which is by April, 2016 unless you receive an extension of time to file.
FBAR filings can be overwhelming, especially if you have never filed one before. If this is the case, our experienced international FBAR Lawyers can assist you in ensuring you are compliant with IRS FBAR Law and FATCA requirements.
Who is Required to File an FBAR?
Not everyone who has foreign accounts is required to file an FBAR. Rather, it is required to be filed by all U.S. Taxpayers (whether they reside in the U.S. or overseas) with foreign accounts that have an “annual aggregate total” exceeding $10,000 at any time during the year. Thus, if a U.S. Taxpayer (including Legal Permanent Residents “aka Green Card Holders”) maintains foreign accounts, including banks accounts, financial accounts, or insurance policies that have a combined value of more than $10,000 (or has indirect ownership of the account or signature authority), then that person is required to file an FBAR statement.
What if None of My Accounts Exceed $10,000?
It does not matter. It is important to remember that the threshold is the Annual Aggregate Total value at any given time during the year. This means if you have 101 bank accounts with $100 each at any given time during the year, you are STILL required to file the FBAR and list all the accounts on it, even if none of the accounts exceed $10,000. In other words, you are required to report the total value of all your foreign accounts located in any foreign country once you exceed the $10,000 annual aggregate total threshold on any given day during the year.
There are various accounts and other assets (insurance policies) which may or may not be included in your FBAR analysis. Please contact one of our experienced FBAR Lawyers for further assistance regarding specific account disclosures.
What if I did Not File an FBAR Statement?
If a person fails to file the FBAR, there is still hope. Depending on whether the person also had unreported foreign income (income that was earned overseas and not reported on the U.S. tax return – even if it was reported in a foreign country and foreign tax was paid), the IRS and DOT will determine if a penalty will be issued; usually the taxpayer will be penalized but the amount of the penalty will vary.
What are the Penalties for Failing to File an FBAR?
Recently, the Internal Revenue Service issued a memorandum which details how the IRS “believes” the agents should penalize individuals in accordance with their authority. Essentially, there are two sets of penalty structures and they are based on whether the taxpayer was willful or non-willful.
Willful is determined by a “totality of the circumstances” analysis. Somebody is considered to have acted willfully if they intentionally evaded the payment of taxes or disclosure of foreign accounts. In other words, they willfully or knowingly “knew” about the requirement to disclose and report overseas assets, accounts, and income but chose not to. In these situations, the Internal Revenue Service has the authority to penalize the taxpayer upwards of 50% of the value of the assets per audit year for failing to file the FBAR (in addition to a slew of several other non-FBAR penalties), but no more than 100% value of the account over an audit period.
Generally, audits last three years and the Internal Revenue Service has made it known that they will not penalize the individual beyond the value of the accounts for the audit periods at issue. Thus, if you had $1 million in your foreign bank account and you knowingly did not report this information to the IRS and they audit you for three years, they can take all of your $1 million.
When a person is non-willful, it generally means they were unaware of the requirement to file an FBAR. In this situation, the IRS takes some mercy – but nowhere near as much mercy as you can imagine certain people deserve (example: individuals who relocated from overseas and have foreign accounts that they simply did not use or earn much income on, or individuals who inherit money from overseas relatives.)
In these situations, the IRS has four (4) main options in terms of penalizing the taxpayer:
- The IRS agent can simply issue a warning letter instead of a monetary penalty to the taxpayer. This will rarely happen (although Golding and Golding has achieved this result on multiple occasions for individuals who have been audited and did not file FBAR statements and/or otherwise do not qualify for one of the IRS offshore voluntary disclosure programs, but were non-willful).
- The IRS agent could penalize the taxpayer a total of $10,000 for all of the years that the taxpayer did not file FBAR statements. For example, if the taxpayer is audited for three years and did not file FBARs for those three years, the IRS may penalize the taxpayer $10,000 for the total amount of the audit.
- The IRS agent could penalize the taxpayer $10,000 for each year that the FBAR was not filed. So using the example above, if the taxpayer is audited three years and did not file an FBAR for three years, then the IRS could penalize the taxpayer $30,000 – and usually not beyond the value of the account.
- The IRS agent could penalize the taxpayer $10,000 per account per year. In other words, if the taxpayer had four different bank accounts and was audited for three years – the IRS could penalize taxpayer $120,000.
One very important thing to remember is that the penalty scheme listed above is for non-willful taxpayers. In other words, even though the IRS knows the taxpayer did not intentionally attempt to evade tax, the IRS has the power to still issue tens, if not hundreds, of thousands of dollars in penalties in a non-willful situation.
Whether a person is willful or non-willful is a complex evaluation which requires a comprehensive factual analysis by an experienced FBAR lawyer to ensure the taxpayer is informed before making any representation to the IRS.
Why is it Important to File an FBAR?
Prior to the recent changes in the law, taxpayers were able to fly below the radar and could probably last most of their lifetime without having to file international tax forms disclosing their foreign income and overseas assets. The problem is that under the new FATCA (Foreign Account Tax Compliance Act) laws, foreign countries and the United States are entering into intergovernmental agreements (IGA) with foreign countries.
IGAs are “reciprocity agreements.” In other words, while foreign countries are going to report account information of US taxpayers (U.S. Citizens, Legal Permanent Residents, and Foreign Nationals Subject to U.S. Tax), the United States is going to do the same and report account information to the foreign countries. Thus, there is a benefit to both parties in entering these IGA Agreements.
FBAR compliance is very important for any taxpayer subject to IRS tax reporting requirements. The failure to file a timely FBAR and remain in IRS tax compliance can lead to significant fines, penalties, and other possible consequences.
Golding & Golding, Board-Certified Tax Law Specialist Team
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