The U.S. Congress believes that the tax gap has become a major problem in recent years. The tax gap is the difference in the amount of projected government tax revue and the amount that is actually collected. Senators, representatives, and government employees believe that one of the chief reasons for the tax gap is the use of offshore trusts and accounts by wealthy Americans. They charge that wealthy Americans are placing their assets and income in these foreign entities so as to conceal them and to avoid paying tax and are requiring FBAR reporting.
While nobody likes to pay taxes, the simple fact is that taxes provide the fuel that keeps the government running including the services government provides to the public and funding for the military. In light of the threat the tax gap poses, Congress has passed laws requiring Americans to disclose covered international accounts and assets in annual filings. Americans who fail to satisfy these disclosure obligations are subject to significant penalties and may become a target for a more thorough audit or inquiry.
FBAR Requires Taxpayers to Report Foreign Accounts & Assets to the Government
Report of Foreign Bank & Financial Accounts (FBAR) is a law that requires U.S. persons and U.S. taxpayers to disclose the existence of financial accounts and provide information about the accounts. The duty to file FBAR is triggered when a U.S. person holds or has signature authority over a foreign account or accounts with an aggregate balance in excess of $10,000.
The foreign account or accounts are only required to momentarily exceed $10,000 for a filing obligation to be triggered. IN fact, it is irrelevant whether the accounts are in excess of the filing threshold for one hour or one month – once the $10,000 filing threshold is passed, an obligation to file FBAR exists.
How Do I Make an FBAR Report?
If the taxpayer holds or has signature authority over more than $10,000 in covered foreign assets or accounts he or she must file FBAR. FBAR can only be filed by going online and logging into the Financial Crimes Network’s (FINCEN) Bank Secrecy Act E-Filing Portal. From the portal taxpayers can access FINCEN Form 114 that is used to satisfy one’s FBAR reporting obligation. FINCEN Form 114 must be submitted online through the web portal. There is no option for taxpayers to satisfy FBAR with a traditional pen and paper filing method.
What Penalties Can Individuals Face if they Fail to File FBAR Reports?
FBAR penalties are harsh regardless of the circumstances. Even completely accidental and inadvertent filing errors can result in a penalty of up to $10,000 per a violation. Since violations can be assessed for each year where a foreign account or accounts went unreported, fines can quickly add-up until they become unmanageable. Consulting with a tax professional on a regular basis is typically sufficient to avoid errors, but taxpayers who fail to disclose the existence of foreign accounts or who otherwise do not provide accurate information increase their risk of serious compliance issues.
However, penalties become even more onerous when the IRS or Department of Justice agent believes that the FBAR noncompliance was due to willfulness. Willfulness means that there is some level of intent that motivated the noncompliance. Intentionally endeavoring to avoid learning about a filing obligation or the extent of the obligation is considered willfulness. Additionally knowledge of the filing obligation but voluntarily electing to disregard said obligation is also considered willful behavior. Similarly, keeping two sets of books or taking other steps to conceal the existence of offshore accounts also shows a level of intent and willfulness.
Willful noncompliance with FBAR can be punished extremely harshly. A taxpayer who willfully fails to file FBAR can face a penalty that is the greater of $100,000 or 50 percent of the account balance. Like with non-willful FBAR penalties, willful FBAR penalties can be imposed for multiple years where noncompliance existed. Therefore, it is fairly routine for willful FBAR penalties to exceed the amounts originally held in the offshore accounts. In short, the failure to file FBAR when one is required to do so carries significant consequences and can lead to a financial catastrophe.
Experienced Tax Attorneys for FBAR Reporting & Compliance
If you have questions about FBAR reporting or other offshore account tax obligations the Tax Law Offices of David W. Klasing can provide on-point answers and guidance. To schedule a confidential, reduced-rate legal consultation call us at call 800-681-1295 or contact us online today.