How to Fix Missed FBAR Filings: Will I Get in Trouble?

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How to Fix Missed FBAR Filings: Will I Get in Trouble?

How to Fix Missed FBAR Filings: Will I Get in Trouble?

How to Fix Missed FBAR Filings: Will I Get in Trouble? 

When a U.S. person (U.S. Citizen, Lawful Permanent Resident, or Foreign National who meets the Substantial Presence Test) has foreign accounts, assets, or other investments, they may be required to file the annual FBAR (FinCEN Form 114) to report this information to the U.S. government. It is important for taxpayers to be aware that there is a lot of misinformation and fear-mongering online about the FBAR and what happens to taxpayers who want to fix their FBAR filing. In general, the IRS can penalize taxpayers for failing to file the FBAR. However, they also provide taxpayers with several amnesty opportunities to get into compliance before being penalized, thereby reducing, minimizing, or even avoiding penalties for prior-year missed filings.

It is also important for taxpayers who are considering hiring an attorney to get into compliance to understand the marketplace and be wary of any professional who requires you to sign with them immediately before you have had a chance to research the firm. In general, the IRS does not move that fast, and you typically do not have to shine with a firm immediately that day before having a chance to evaluate your options.

You Are Not a Criminal and Not Going to Jail (99% of the Time)

The first thing to keep in mind is to be very wary of any tax practitioner or attorney who wants you to believe that you are going to go to jail for failing to file the form. Each year, the IRS prosecutes around a few thousand cases, and the majority of those cases have nothing to do with international tax law. Even fewer have anything to do with FBAR filings, and so most taxpayers should have no fear of going to jail or prison for simply failing to file an FBAR — unless they have committed other crimes, such as tax fraud, tax evasion, or money laundering.

Most FBAR Violations are Civil Violations

Most FBAR violations are civil violations. When a tax violation is civil as opposed to criminal, it means that there is no risk of incarceration or criminal liability. Rather, the key issue will be whether the taxpayer is subject to non-willful civil war penalties or willful civil FBAR penalties. The majority of foreign account violations are non-willful, and therefore most taxpayers will qualify for one of the amnesty programs that offer a reduced penalty or even a complete penalty waiver.

FBAR Amnesty Programs

Here’s a list of the different amnesty programs and a summary of each program. It is important to note that the IRS can change these programs at any time, such as changing the eligibility requirements, increasing the penalty or removing the programs completely.

Voluntary Disclosure (VDP/OVDP)

The Voluntary Disclosure Program (VDP) has been around for many years. Back in 2009, the Internal Revenue Service had developed an offshoot of the program referred to as OVDP for offshore matters. The OVDP version of these procedures became stricter over the years before being terminated in 2018.

Since 2018, taxpayers who have unreported foreign accounts, assets, investments, and/or income have submitted to the traditional VDP program.

Streamlined Procedures (SFCP/SDOP/SFOP)

In 2014, the Internal Revenue Service developed the stand-alone streamlined procedures that were developed out of OVDP. These procedures are designed to reduce the requirements for non-willful taxpayers. Depending on whether a taxpayer qualifies for the offshore program for U.S. residents, SDOP, or the offshore program for foreign residents (SFOP) will dictate the specific requirements, but taxpayers must be non-willful. These programs are much more complicated than meets the eye.

We have represented thousands of taxpayers in over 80 countries on matters involving offshore disclosure. Recently, unfortunately, there has been an uptick in sloppy submissions by attorneys who claim to be experts (aka ‘self-purported experts’) but are nowhere as experienced as they claim to be. And, while mistakes do happen (and can usually be fixed), depending on whether it is a serious tax error or not can significantly impact the success of the submission and the chance of audit.

IRS Delinquency Procedures

There are some alternatives to making a streamlined submission, especially for taxpayers who do not qualify for the offshore penalty waiver under the streamlined foreign version of the program. Alternatively, some taxpayers may qualify for the delinquency procedures.

Delinquent FBAR Submission Procedures (DFSP)

There are two versions of the delinquency procedures: the first version of the program is for taxpayers who only have delinquent FBAR and no substantive changes to their tax returns. This is referred to as the Delinquent FBAR Submission Procedures.

Currently, the IRS still offers a penalty waiver for taxpayers who qualify for this program.

Delinquent International Information Return Submission Procedures (DIIRSP)

Taxpayers who have to file or amend other forms beyond just the FBAR do not qualify for DFSP. Instead, they qualify for the Delinquent International Information Return Submission Procedures. Before November 2020, the IRS all but guaranteed a penalty waiver for taxpayers who met the requirements of the program. Unfortunately, after November 2020, the IRS no longer offers an automatic penalty waiver. As a result, many taxpayers have found themselves penalized for failure to file certain forms, such as Form 3520. If a taxpayer is penalized, they still have the opportunity to dispute the penalty, but it can be an uphill battle depending on the specific facts and circumstances as well as which agent or examiner is reviewing the case.

Reasonable Cause

For taxpayers who can show their non-compliance was a result of reasonable cause and not willful neglect may qualify for the reasonable cause alternative to offshore disclosure. For taxpayers who qualify for reasonable cause come with they are not penalized because when a taxpayer can show reasonable cause, the IRS does not have the right to penalize them for their non-compliance.

There is no specific ‘reasonable cause form’, and Taxpayers should consult with a specialist before making any submission to the IRS.

Late Filing Penalties May be Reduced or Avoided

For Taxpayers who did not timely file their FBAR and other international information-related reporting forms, the IRS has developed many different offshore amnesty programs to assist taxpayers with safely getting into compliance. These programs may reduce or even eliminate international reporting penalties.

Current Year vs Prior Year Non-Compliance

Once a taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, taxpayers should consider speaking with a Board-Certified Tax Law Specialist who specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties. 

Need Help Finding an Experienced Offshore Tax Attorney?

When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for Taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting. 

*This resource may help Taxpayers seeking to hire offshore tax counsel: How to Hire an Offshore Disclosure Lawyer.

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure. 

Contact our firm today for assistance.