One of the greatest mysteries of international tax law is why FBAR penalties are so absurdly high.
As you may or may not be aware, an FBAR (Report of Foreign Bank and Financial Accounts) is one of the most controversial forms required to be filed by the U.S. Government.
Why? Because while it is a relatively easy form with a small threshold requirement, the penalties for failing to file the form are exorbitantly high — and far exceed the “crime.”
An FBAR or FinCEN 114 is a form required by the Financial Crimes Enforcement Unit. Even by the name of the form alone, it is evident that when the form was first introduced, the purpose of it was to crackdown on international financial crime.
Under most circumstances, the FBAR form must be filed by any individual who has ownership, joint ownership, or signature authority over $10,000 in funds held in qualifying accounts of foreign banks. It is important to note that the total value of all of the accounts is an aggregate total that exceeds $10,000 — on any day of the year — and not $10,000 per account.
For example, if Michelle has three (3) accounts overseas, each of them that have $400,000 in it, she would file the FBAR and report all 3 accounts; conversely, Scott may have nine (9) accounts that all have less than $10,000, but when aggregated (totaled) the value exceeds $10,000 — Scott would also have to report all the accounts on the FBAR.
The penalties can be extreme. For example, even in this situation in which a person was non-willful and/or had literally no idea that they were supposed to report their Foreign Accounts, the person may be subject to fines and penalties as high as $10,000 per account, per year.
Moreover, if the accounts are generating income that exceeds $5,000 per year, then the IRS can audit the individual for six (6) years instead of three — without having to go through the same hurdles it would have to under the other six-year audit scenario — in which the IRS would have to prove that there is more than 25% of unreported income.
Thus, in an example where Michelle had three accounts that each generated $3000 worth of income, she could be audited for six years and possibly have to pay $30,000 a year, in FBAR penalties for six years (aka $180,000). It should be be noted that the IRS does not always penalize an individual the total amount that they could — but they do have the power to do so, and even the recommended penalty is high – $10,000 per year.
Even using the recommended penalty, that would mean just because Michelle was unaware of the requirement to report her foreign accounts, she will now have to pay upwards of $30,000-$60,000 in FBAR penalties alone (not to mention other penalties for forms she may not a filed such as a FATCA Form 8938, 3520, 3520-A 5471, 5472, 8621, 8854). Unfortunately, each of the aforementioned forms carries with it its own penalty.
The Purpose of the FBAR Penalties
The purpose of the penalty is to dissuade individuals from attempting to hide or shelter money overseas outside of the view of the U.S. government. And, if a person is going to keep money offshore (Even if the foreign account is actually in your country of citizenship), then they must report it annually and update the U.S. Government accordingly.
The U.S. government believes that by implementing these laws (The FBAR has been around since the 1970s but only recently became a main stay of enforcement following the introduction of FATCA – Foreign Account Tax Compliance Act) that it will force individuals to get into compliance. The problem is that many good people are unaware of the law and for them it is completely and utterly absurd that they a pay penalty — solely because they did not know about the law.
It is not as if the IRS goes door-to-door, inquires about your legal status, and then provides you a summary about what your reporting requirements are.
If you are out of compliance, then one of the most effective and safest methods for getting into compliance is through voluntary disclosure.
Golding & Golding, A PLC
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