FBAR Mistakes – IRS Procedures for Correcting FBAR Errors
The FBAR is enforced by the IRS, and FBAR Penalties can be severe.The FBAR (Foreign Bank and Financial Account Reporting Form). It is also referred to as FinCEN 114, and due to be filed each year by any U.S. Person who meets the threshold requirements for filing the form.
While the form in and of itself is not as difficult as some people would like to make you believe it is, there are some very specific rules regarding filing of the FBAR form.
If you make mistakes when filing the FBAR and are out of compliance for either not filing the form, or filing the form late (aka Untimely FBAR) — the penalties can be tough — although you may qualify for offshore tax amnesty.
Here is a list of some recent FBAR mistakes we see often:
Minor Children and FBAR Reporting
That’s right, that bank account that your mother-in-law opened for your newborn it Is not exempt from FBAR reporting. Just because your child is a “minor” does not mean the child is exempt from filing the annual FBAR.
So little Timmy, who just took his first steps and is working on pushing out his first words could potentially get hit with an FBAR penalty for not filing the form.
Foreign Retirement Accounts
Foreign retirement accounts are required to be reported on the annual FBAR. Therefore, even if you have not contributed to your UK retirement, Singaporean CPF, or Australian superannuation — it is still currently reportable on the annual FBAR.
*Unlike the United Kingdom and Australia in which the U.S. has a tax treaty treaty the U.S has not entered into a bilateral tax treaty with Singapore, which impacts the taxation of accrued but non-distributed growth within the CPF.
Foreign Life Insurance
It is pretty hard to believe that anyone would consider a life insurance policy that contains either a surrender value or cash value as an account — but as far as the annual FBAR is concerned, it is still reportable.
Therefore, if you have a foreign life insurance policy with a surrender value or cash value — it is important that you included it on your FBAR.
*You may also have an immediate tax liability on the growth within the policy, and if you are paying foreign life insurance premiums may have a form 720/Excise tax requirement.
Slicing FBAR Values in Half
Let’s say for example you have joint ownership of a foreign bank account, which is valued at $700,000. Even though you only have a 50% interest in the account (and that only $350,000 dollars of the account money belongs to you) that is not what the FBAR is asking.
Rather, the FBAR is asking you for the total value of the account — not just your highest value apportioned to your percentage of ownership.
Therefore, even if you were only a partial owner of a foreign account, when the FBAR asks for the highest maximum value, you are required to include the total value of the account.
Reporting Dormant or Closed Accounts
FBARs are similar to tax returns, in that when you file the FBAR in the current year, you are reporting the maximum balance for the prior-year.
Therefore, even if you close the account in 2019, you still have to file an FBAR in 2020 to report the maximum balance in 2019 — because the account was still open in 2019.
** If you have no other accounts for example, then 2020 (to report the 2019 maximum balance) would be a last year you would file, unless you open another account.
Late or Unfiled FBAR Fines and Penalties
If you have not filed your FBARs in the prior years that you were required to file – and/or you filed them late – you may be subject to fines and penalties. Things may get inifinitely worse if you file (or filed) a quiet disclosure.
You may use IRS offshore tax amnesty/voluntary disclosure to try to reduce, minimize, or eliminate these penalties.
Importance of Tax Amnesty
If the IRS finds a Taxpayer before the Taxpayer has a chance to submit to Voluntary Disclosure/Tax Amnesty, the follwing may occur:
- The IRS gets wind of peters situation and issues in audit/examination notice. As a result, Taxpayer is disqualified from submitting to IRS tax amnesty/voluntary disclosure.
- The IRS launches a special agent investigation to dig deeper into Taxpayer’s finances.
- The IRS refers the matter to the Department of Justice for its own investigation.
Consider Offshore Disclosure with a Board Certified Tax Specialist Attorney
It is human nature to want to avoid making a proactive submission to a government agency such as the IRS before the IRS ever discovers the non-compliance. But, typically that is best path forward.
Moreover, if you realize you are out of compliance and begin researching online, you may begin to feel as though it is hopeless. Some of these attorneys and CPAs make it appear that everyone with unreported assets or income is going to be severely penalized and shipped off to prison.
That is simply not the case.
You have options, and depending on the facts and circumstances of your situation, your options may include the streamlined program, reasonable cause, or the delinquency procedures – which may result in significantly reduced fines and penalties (and may even receive a penalty waiver).
Golding & Golding, A PLC
We have successfully represented clients in more than 1,000 streamlined and voluntary disclosure submissions nationwide and in over 70-different countries.
We are the “go-to” firm for other Attorneys, CPAs, Enrolled Agents, Accountants, and Financial Professionals across the globe.
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Sean holds a Master's in Tax Law from one of the top Tax LL.M. programs in the country at the University of Denver. He has also earned the prestigious IRS Enrolled Agent credential. Mr. Golding's articles have been referenced in such publications as the Washington Post, Forbes, Nolo, and various Law Journals nationwide.