Report of Foreign Bank and Financial Accounts (FBAR) has long required taxpayers to disclose the existence of certain offshore accounts and assets when the aggregate value of those accounts and assets exceeds $10,000. While this obligation has existed for years, it is only fairly recently that the U.S. government has focused on enforcement of offshore account disclosure. Under a reform bill, the FBAR penalties for willful reporting failures was strengthened. Additionally, a new penalty that punishes even accidental reporting failures was established. If the heightened FBAR penalties weren’t enough, the passage of FATCA and corresponding international tax information sharing treaties provides the U.S. government with a wealth of information to use to identify and prosecute noncompliant U.S. taxpayers.
Taxpayers who have not filed FINCEN 114 to satisfy his or her FBAR obligation face a high risk of identification. Taxpayers who are identified as noncompliance with FBAR can face harsh penalties and other consequences.
Taxpayers can face serious consequences for even an accidental failure to file FBAR or for other inadvertent deficiencies. Noncompliance with FBAR that is likely to be deemed non-willful or accidental includes:
- Failure to file without the presence of action or inaction that would suggest intent or willfulness.
- Forgetting to include a single foreign account.
- Filing FBAR late by several days.
- Failure to realize that a certain account type or asset type was covered by the FBAR disclosure obligation.
FBAR compliance issues of this type can, upon conviction, be punished by a fine of up to $10,000 for each instance of non-compliance. This means that a penalty can be imposed for each year where a reporting obligation existed but the taxpayer failed to do so. Of course, the IRS agent or attorney from the Department of Justice may perceive your actions differently than you intended and think that your actions were willful. Willful FBAR violations are punished significantly more harshly.
Questions and Answers about FBAR Compliance and Disclosure
- Potential charges for not participating in the 2014 OVDP
- How many tax returns will I amend for my FBAR filing?
- FBAR Voluntary Disclosure program end
- Can I make a voluntary disclosure after the deadline?
- Can I use IRS Voluntary Disclosure if I Can’t Pay?
- Potential reporting requirements and civil penalties
- What Happens if You Don’t Disclose Foreign Accounts
- Criminal charges if you refuse voluntary disclosure
- Characteristics of FBAR voluntary disclosures
- What is required to make a valid voluntary disclosure?
- 2012 Offshore Voluntary Disclosure Initiative Objectives
- What is an FBAR?
- Filed amended returns without making a Voluntary Disclosure
- Undisclosed foreign accounts: What exchange rate to use
- Why did the IRS announce the 2012 OVDI at this time?
- Should I consider making an offshore voluntary disclosure?
- Why to consider making a Voluntary Disclosure
- 2012 OVDI program vs. the voluntary disclosure practice
- Foreign bank account asset reporting/filing requirements
What Penalties Can I Face for a Willful FBAR Violation?
A willful FBAR violation is a compliance issue that can lead to significant penalties and may even result in additional tax problems stemming from any failure to pay taxes on the undisclosed accounts. A willful FBAR violation is one that can be attributed to a voluntary or an intentional failure to satisfy a known legal obligation. Intentionally avoiding opportunities to learn about the FBAR disclosure obligation – willful blindness – can subject an individual to liability for a willful FBAR violation. Likewise, a taxpayer who fails to file FBAR and then attempts to conceal the compliance failure would have also engaged in willful behavior.
Willful FBAR violations are punished severely upon conviction. A willful FBAR violation can subject an individual to a fine equaling the greater of $100,000 or 50 percent of the account balance. Since penalties for willful FBAR violations can be imposed for multiple years, penalties routinely exceed the original balance of the account. Furthermore, when willful behavior is present, there is an increased likelihood that the taxpayer may face additional criminal charges for interference with the administration of the U.S. Tax Code, tax evasion, or tax fraud.
Taxpayers With Undisclosed Offshore Accounts Face a Heightened Risk of Detection
Congress has not only authorized increased penalties for noncompliant taxpayers, it has also passed laws to give federal prosecutors the tools to identify and pursue noncompliant individuals. Aside from the disclosure obligations set forth in FBAR, Foreign Account & Tax Compliance Act and its corresponding international information sharing agreements means that foreign tax authorities are providing the U.S. government information about U.S. linked accounts. Agents from the IRS and DOJ are using this information to identify and pursue taxpayers who have not made required foreign disclosures.
FBAR & FATCA Problems Can Be Handled Through OVDP
Offshore Voluntary Disclosure Program and Streamlined Disclosure can mitigate the consequences the taxpayer faces due to one’s failure to disclose offshore accounts. However, taxpayers must act swiftly to take advantage of this program because any enforcement action taken against the taxpayer will make that individual ineligible for reduced penalties. Furthermore, even if the taxpayer’s eligibility is undisturbed, the foreign bank or financial institution may be added to the IRS’ facilitators list. Banks on this list require the taxpayer to pay a heightened offshore compliance penalty. Therefore it is almost always in the taxpayer’s best interests to seek guidance in a timely manner.
Failure to File FBAR Fines and Non-Filing Penalties
American taxpayers with money or assets in offshore bank or financial accounts are required to disclose these accounts through the Foreign Bank and Financial Account Report, or FBAR, if the aggregated value of these offshore financial accounts exceeded $10,000 at any time during the previous calendar year. If you fail to make this report as required and are caught by the IRS, you could face serious penalties. A civil non-willful violation of the FBAR reporting requirement is subject to a civil penalty of $10,000, as per 31 U.S.C. § 5321(a)(5) (B)(i), unless the agency finds that there was reasonable cause for the violation, in which case they can choose to impose no penalty. A willful violation is subject to a civil penalty equal to the greater of $100,000 or 50 percent of the aggregate balance of accounts reportable on an FBAR, as per 31 U.S.C. § 5321(a)(5)(C). Willful failure to file an FBAR can also result in criminal prosecution if the matter is referred to the IRS’ criminal investigation unit.
How a Lawyer Can Help Get You Back into Compliance
There has been a long-standing policy within the IRS that taxpayers who come forward and voluntarily disclose false or misleading information on their tax returns, and pay what they owe plus interest and fines, will be shielded from criminal tax or foreign information reporting prosecution. In the early 2010s, the IRS began a program known as the Offshore Voluntary Disclosure Program (OVDP), which allowed taxpayers who failed to make required FBAR reports in previous years, often accompanied by a failure to pick up any related taxable foreign income, to self-disclose the information that should have been reported in exchange for severely limiting the potential civil penalties they could face and avoiding criminal prosecution. This program was a large success but was cancelled in 2018 due to declining taxpayer participation.
However, you can now make both foreign and domestic disclosures through the IRS’s new Voluntary Disclosure Practice (VDP). This program is available for willful and non-willful conduct related to failure to file an accurate or complete FBAR as well as other forms of tax fraud and or, foreign information reporting noncompliance. However, although your financial damages will be somewhat mitigated, and you will be securing a near-guaranteed pass on criminal prosecution, the fines you will be required to pay can still be very steep. Aside from owing taxes and interest on the past 6 years of tax deficiencies related to any unreported offshore taxable income, you will also have to pay a civil fraud penalty of 75% on the highesttax deficiency year out of the past 6, and an additional penalty of 50% of the highest aggregate balance of the offshore financial accounts over the period of the disclosures, or $100,000, whichever is greater, will be assessed.
It is important to note that once the IRS has begun an audit or a criminal tax investigation into your situation, it will be too late to enter any of these voluntary disclosure programs. Therefore, it is vital that you reach out to an experienced dual licensed International Tax Attorney and CPA like those at the Tax Law Offices of David W. Klasing as soon as possible. The longer you wait, the better chance that the IRS will catch on to your behavior and you will be foreclosed from using the IRS’s Voluntary Disclosure Practice (VDP) to get back into compliance with predictable & partially mitigated civil penalties and avoiding criminal prosecution.
The experienced team of tax professionals at the Tax Law Offices of David W. Klasing can present your options and help you avoid FBAR penalties and come back into compliance with the U.S. Tax Code. To schedule a reduced-rate FBAR and offshore account consultation, call 800-681-1295 or contact us online today.