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.
What Penalties Can I Face for Failing to File FBAR?
The major factor determining the severity of penalties you will face if you fail to file FBAR and are caught through an IRS audit or criminal tax or foreign information investigation is whether your conduct was willful, meaning intentional, or non-willful, meaning some sort of honest mistake or miscalculation. For non-willful violations, criminal penalties typically will not apply, and civil penalties will be limited to $10,000 for the non-willful failure to file an FBAR on a calendar year basis. For a willful violation, the maximum penalty is increased from $10,000 per violation to $100,000 per violation or 50% of the amount in the account at the time of the violation, and you can additionally face criminal prosecution and incarceration if you are charged with and convicted of tax evasion of offshore taxable income related to the non-disclosed foreign financial accounts and or criminal foreign information reporting failure.
How Can a Dual Licensed International Tax Attorney & CPA Help Me Get Back into Compliance?
In some situations, especially if your issue was recent and due to unintentional error, you may be able to simply amend the returns and pay what you owe. Often, however, you will need the help of a veteran tax attorney like those at the Tax Law Offices of David W. Klasing to apply for a streamlined or voluntary disclosure program to get you back into compliance.
For conduct that was non-willful, you may be eligible for a streamlined voluntary disclosure program. However, it is important to note that you must certify as to your non-willfulness as a condition of entering this program, and that false certifications of non-willfulness qualify as an additional crime with additional serious penalties.
As part of the program, you will be required to amend 3 years of tax returns that includes any previously unreported offshore taxable income and 6 years of FBARs, which we can help to reconstruct. You will also have to pay back what you owe. Aside from avoiding criminal tax and offshore information reporting charges, for qualifying expats, you will also avoid the “offshore penalty” entirely. For residents, you will have to pay a offshore penalty of 5% on the highest aggregate account balances over the course of the six years of FBARs included in the program.
Offshore Voluntary Disclosure
For conduct that could easily be viewed by the federal or state taxing authorities as willful, you will need to enter an offshore voluntary disclosure program to remove the risk of criminal tax or information reporting prosecution. Currently, federal domestic and offshore voluntary disclosures fall under a combined program known as the Voluntary Disclosure Practice (VDP). The offshore version of this program allows taxpayers who are out of compliance with past FBAR and other foreign information reporting requirements, ordinarily involving evaded taxable income from offshore income producing asset, business, trusts, estates or financial accounts, to come forward and make disclosures about their, often intentional, reporting errors without facing criminal tax or foreign information reporting prosecution.
The new VDP program incorporates the old OVDP process and additionally allows for associated domestic disclosures as per traditional IRS voluntary disclosure practice. It is open to both willful and non-willful violators. In a purely domestic voluntary disclosure, in exchange for a near guaranteed pass on criminal tax and information reporting prosecution, you will have to pay all back taxes plus interest, and you will also have to pay a civil fraud penalty of 75% on the highesttax deficiency year out of 6 amended returns included in the disclosure. For an offshore voluntary disclosure, an additional penalty will be assessed of whichever is greater: 50% of the highest aggregate balance of the account over the six-year period of the FBARs, or $100,000.