Compliance with FBAR: Penalties, Traps, Investigations & Defenses

2025 FBAR Investigation, Compliance, Penalties, Traps & Defenses

2025 FBAR Investigation, Compliance, Penalties, Traps & Defenses

In recent years, there has been a significant increase in IRS enforcement of FBAR (FinCEN Form 114) compliance and related foreign account reporting matters. Even though the FBAR form has been around for over 50 years, with the introduction of FATCA Form 8938 in 2011/2012 came an expansion of the US government’s offshore compliance protocols enforcement, and the IRS has zeroed in specifically on FBAR and foreign account disclosures. Each year, more and more taxpayers are being investigated by the IRS for foreign account and FBAR-related compliance, including audits, examinations, and penalty assessments. Sometimes, the FBAR is the primary issue, and sometimes it is an ancillary issue to other non-compliance factors such as unreported income or failing to file Form 3520, 3520-A, or 8621. Let’s take a brief look at how the FBAR landscape has changed.

FBAR Compliance

U.S. taxpayers should be aware that hundreds of thousands of foreign financial institutions (FFIs) report US account holder information to the IRS and the US government. That means that compliance is very important, because if the IRS already has taxpayer background information — even if the taxpayer believes their foreign financial institution is not reporting them — it makes it easier for the IRS to assess fines and penalties.

Investigations into FBAR Non-Compliance

When it comes to FBAR investigations, sometimes they are the main focus of the investigation, and other times the FBAR investigation is  ancillary to other related issues. For example, sometimes the audit is a full-blown FBAR audit, and other times it is an ordinary tax audit that expands into questions involving foreign accounts or assets. Likewise, the taxpayer may be under examination for failing to report a foreign business or possibly failing to report cryptocurrency, and this leads the IRS agent down the path of asking questions about whether there is income overseas and, if so, whether there are assets located overseas as well.

Common FBAR Traps

The FBAR is not as complicated as many other international reporting forms, such as Form 5471 or Form 3520-A, but there are some common FBAR traps that taxpayers fall into. Here are some of the common FBAR Pitfalls:

• • • It is not $10,000 per account, but rather $10,000 in aggregate total of all accounts combined.

    • Even if the account is dormant it is required to be reported on the FBAR.

    • even if the account was opened before the taxpayer became a US person, it is required to be reported on the FBAR.

    • If the account does not generate any income, it is still reportable for FBAR purposes.

    • FBAR is not limited to just bank accounts, but also includes investment accounts, pension plans, and life insurance policies as well as other types of investments.

FBAR Penalties

When it comes to FBAR penalties, typically, fines will be civil non-willful penalties and not civil willfulness or criminal FBAR penalties. In the recent Supreme Court case of Bittner, the court limits non-willful FBAR penalties to $10,000 per year — although that $10,000 adjusts for inflation and is now closer to $15,000+. In other words, the IRS is no longer empowered to penalize taxpayers based on the number of accounts as they were able to do before the Supreme Court ruling. Depending on the facts and circumstances, the IRS may try to assert that the taxpayer was willful, in which the taxpayer becomes subject to a much larger penalty (50% of the maximum value of each account that was unreported), with a minimum penalty amount of $100,000, which also adjust for inflation. While Taxpayers may have the opportunity to mitigate non-willful civil penalties, it is much more difficult to convince an IRS agent to mitigate willfulness penalties. Finally, although it is rare, some taxpayers may become subject to criminal FBAR penalties. This is typically in situations in which there are other tax crimes associated with the non-compliance — and not just failing to report an account. For example, if the taxpayer is guilty of crimes such as structuring, smurfing, fraud, evasion, or laundering, then there may be the potential for criminal FBAR penalties.

FBAR Litigation

Taxpayers have the right to challenge penalties by litigating them in Federal Court, but because the FBAR is not technically a tax form per se,  courts have ruled that taxpayers do not have the opportunity to litigate the case in Tax Court (which is often preferred, because taxpayers do not have to pay the tax or penalty first to litigate and tax court). However, the Flora rule (which requires taxpayers to pay the tax due first before challenging the U.S. government in federal court) may not apply to FBAR cases, meaning that taxpayers may have the opportunity to challenge the FBAR penalty without having to pay the amount due first.

Late Filing Penalties May be Reduced or Avoided

For Taxpayers who did not timely file their FBAR and/or 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.

Late-Filing Disclosure Options

If a Taxpayer is out of compliance, there are various international offshore tax amnesty programs that they can apply to safely get into compliance. Depending on the specific facts and circumstances of the Taxpayers’ noncompliance, they can determine which program will work best for them.

*Below please find separate links to each program with extensive details about the reporting requirements and examples.

Streamlined Filing Compliance Procedures (SFCP, Non-Willful)

The Streamlined Filing Compliance Procedures is one of the most common programs used by Taxpayers who are non-willful and qualify for either the Streamlined Domestic Offshore Procedures or Streamlined Foreign Offshore Procedures.

Streamlined Domestic Offshore Procedures (SDOP, Non-Willful)

Taxpayers who are considered U.S. residents and file timely tax returns each year but fail to report foreign income and/or assets may consider the Streamlined Domestic Offshore Procedures.

Streamlined Foreign Offshore Procedures (SFOP, Non-Willful)

Taxpayers who are foreign residents may consider the Streamlined Foreign Offshore Procedures which is typically the preferred program of the two streamlined procedures. That is because under this program Taxpayers can file original returns and the 5% title 26 miscellaneous offshore penalty is waived.

Delinquent FBAR Submission Procedures (DFSP, Non-Willful/Reasonable Cause)

Taxpayers who only missed the FBAR reporting and do not have any unreported income or other international information reporting forms to file may consider the Delinquent FBAR Submission Procedures — which may include a penalty waiver.

Delinquent International Information Returns Submission Procedures (DIIRSP, Reasonable Cause)

Taxpayers who have undisclosed foreign accounts and assets beyond just the FBAR — but have no unreported income — may consider the Delinquent International Information Return Submission Procedures. Before November 2020, the IRS was more inclined to issue a penalty waiver, but since then this type of delinquency procedure submission has morphed into a reasonable cause request to waive or abate penalties.

IRS Voluntary Disclosure Procedures (VDP, Willful)

For Taxpayers who are considered willful, the IRS offers a separate program referred to as the IRS Voluntary Disclosure Program (VDP). This program is used by Taxpayers to disclose both unreported domestic and offshore assets and income (before 2018, there was a separate program that only dealt with offshore assets (OVDP), but that program merged back into the traditional voluntary disclosure program (VDP).

Quiet Disclosure

Quiet disclosure is when a Taxpayer submits information to the IRS regarding the undisclosed foreign accounts, assets, and income but they do not go through one of the approved offshore disclosure programs. This is illegal and the IRS has indicated they have every intention of investigating Taxpayers who they discover intentionally sought to file delinquent forms to avoid the penalty instead of submitting to one of the approved methods identified above.

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.