Why and How to File FBAR
Filing FBAR is an essential obligation for many taxpayers holding offshore accounts and assets in excess of reporting limits. Taxpayers that fail to file FBAR or otherwise fail to satisfy his or her offshore account disclosure duty face the risk of an IRS inquiry and additional tax enforcement action. In fact, even an accidental error regarding FBAR can result in a $10,000 penalty for each year whether account went unreported. Furthermore, if the government agent believes that your noncompliance is the product of intentional or voluntary behavior – willfulness – then penalties become even harsher and typically exceed the original account balance.
However, many taxpayers are still confused regarding the steps that they need to take to comply with this tax obligation. One source of confusion is in the form used and steps needed to file the FBAR. Understanding the proper form to file to disclose covered offshore accounts is the first step in satisfying one’s FBAR obligation.
How Can I File?
In years past the FBAR used to be able to be filed on a traditional paper form. However, in recent years the IRS has eliminated a taxpayer’s ability to file using a traditional pen and paper method. Therefore Form TD F 90-22.1 is no longer available and is no longer accepted by the IRS. Today, the only way to file FBAR is to do so online. Taxpayers with a FBAR filing obligation can only file FBAR by logging on to the Financial Crimes Enforcement Network’s (FINCEN) Bank Secrecy Act E-Filing system and electronically filing FinCen Form 114. Through this system a taxpayer can locate and complete the required forms.
What IRS Form Do I Use to File?
FBAR can only be filed online using FINCEN Form 114. Starting on July 1st, 2013, FINCEN Form 114 became the only accepted method of filing FBAR. When a taxpayer completes FINCEN Form 114 he or she must include all covered foreign accounts and assets, exempt assets, values of assets, and other information. However it is essential to provide the information in a format that is expected, usable, and acceptable. Some formatting items of note include:
- Telephone numbers – All telephone numbers provided in satisfaction of one’s FBAR duty should be formatted without parenthesis and hyphens. For instance, a telephone number normally formatted (123) 456-7890 should be provided on FINCN Form 114 in the format: 11234567890.
- Social security numbers – Like telephone numbers, Social Security numbers and TINS should also be formatted without hyphens.
- Reports of monetary value – Taxpayers must report the maximum value of their accounts. All accounts are required to be reported in U.S. dollars. Furthermore, taxpayers must value their accounts using accepted methods. Once the account has been properly valued, it should be reported by rounding up to the next whole dollar.
- Prohibited FBAR Form Entries – Certain common abbreviations and other text should never be entered onto the FBAR form. These prohibited phrases include: AKA, DBA, NA, SEE ABOVE, NONE, UNKNOWN, SIGNATURE CARD, VARIOUS, and other phrases.
Aside from proper formatting, it is essential that taxpayers ensure that the substance of their FBAR filing is complete and accurate. Inaccurate or incomplete FBAR filings can also result in severe consequences. If you fear that you have made errors in past FBAR filing or have yet to file FBAR, you should take immediate action.
OVDP and Other Disclosure Programs Can Mitigate the Consequences You Face
Taxpayers who have failed to file FBAR in years past or who failed to include all foreign accounts can face significant penalties. However, these penalties can often be mitigate through participation in Offshore Voluntary Disclosure programs (OVDP) or Streamlined Disclosure. While Streamlined participants can eliminate a greater amount of penalties, the risk is greater and the program should only be utilized by taxpayers in appropriate circumstances. An experienced tax attorney can help a taxpayer make this determination.
However, time is often of the essence when it comes to FBAR problems because detection and identification of your undisclosed accounts makes you ineligible for OVDP and other programs. Furthermore, if your financial institution is identified by the IRS, you will have to pay an increased offshore penalty. Therefore, taxpayers who file FBAR and take action in a timely manner regularly avoid the worst-case scenario and are able to enter back into compliance with the U.S. tax system. To schedule a reduced-rate, private FBAR consultation contact the Tax Law Offices of David W. Klasing by calling 800-681-1295 or contact us online today.