Owning a foreign bank account comes with a lot of responsibility for a taxpayer. The taxpayer is required to make the appropriate filings to the Internal Revenue Service and other agencies that may need information about their foreign financial dealings. However, when a person accidentally does not report their foreign bank account, they could face several legal problems. It is important to resolve these issues quickly to avoid being subject to hefty civil penalties or possibly even criminal penalties. The Tax Law Offices of David W. Klasing is here to present you with options for how to handle the accidental failure to report a foreign bank account.
Determining When Failure to Report a Foreign Bank Account is Accidental
Any taxpayer who opens a foreign financial account should know that the United States taxes citizens and other U.S. persons on global income. This means that income that is earned in a foreign account will be subject to U.S. taxes.
To inform the IRS of their foreign financial account, a taxpayer must file a Report of Foreign Bank and Financial Accounts (FBAR) (FinCen form 114). It is normal for taxpayers to miss an FBAR filing if they are unfamiliar with FBAR regulations. However, note that failing to make an FBAR report may not excuse a taxpayer from penalties because they were mistaken.
While an accidental failure to file an FBAR does not save a person from penalties, it could affect the penalties that are assessed to the individual. There are two categories for FBAR penalties based on the mindset of the offender: willful penalties and non-willful penalties. If a taxpayer is mistaken about when they needed to file an FBAR, they could be issued a non-willful penalty.
Explaining Non-willful Failure for FBAR
The IRS has not established a bright-line rule that could be used to explain when a taxpayer commits a non-willful violation of FBAR regulations. Instead, the IRS had opted to use a “totality of the circumstances” test to assess when a violation was non-willful. There are several questions that the IRS may issue to a taxpayer to determine their intent when they violated FBAR rules:
- The aggregate value of the unreported accounts
- The amount of income earned across all the accounts
- Whether the taxpayer received assistance from a CPA or other professional when filing their taxes
- Whether the tax professional inquired about your foreign income
- The length of time the taxpayer was considered a U.S. person
- The first time the taxpayer had to file a return
Note that this is not a complete list. Our dually licensed California Tax Attorneys and CPAs could help prepare you for the questions that will be posed by the IRS if this issue ever came to light.
Conscious Avoidance of Foreign Bank Account Reporting
If the IRS determines that the taxpayer’s missed FBAR filing was the result of “conscious avoidance,” they could be assessed heavy penalties. The conscious avoidance doctrine, also referred to as willful blindness, examines two factors to determine why a person violated FBAR regulations:
- Whether the defendant subjectively believed there was a high chance that a factor existed
- The defendant went through overt actions in order to avoid a fact concerning their FBAR reporting behavior
Essentially, in order to be held responsible for willfully violating FBAR regulations, the defendant must have had access to information that would have increased the chance that they made an accurate and timely FBAR report. However, the plaintiff or prosecution would still need evidence to show that the defendant intended to avoid paying taxes owed under FBAR.
Penalties for Violating FBAR Regulations
There are multiple tiers of penalties for FBAR violations depending on the circumstances of the case. If a person committed a non-willful violation of FBAR, there are four types of FBAR penalties that they may be assessed.
In some cases, the taxpayer may be able to negotiate with the IRS to show that their failure to file was accidental. As a result, the IRS examiner may use their discretion to waive the FBAR penalty through IRS Letter 3800.
If the examiner seeks to assess a penalty against the taxpayer but wants to be lenient, they may suggest a $10,000 penalty for all FBAR violations committed by the plaintiff. Alternatively, if the taxpayer has multiple penalties across multiple years, they could be penalized $10,000 for every year they committed a violation.
A taxpayer may have to pay even greater penalties for violations that were intentional including a penalty of up to 50% of the cumulative offshore account balance. Additionally, the criminal penalties for FBAR violations could reach up to $250,000 in fines and up to 10 years in prison.
Do not hesitate to contact our firm if you are facing penalties due to a neglected FBAR filing.
Contact Us Today if You Accidentally Failed to Report Your Foreign Bank Account
If you own or control a foreign bank account and you unknowingly failed to report it to the IRS, especially where you did not report any income on the account for tax purposes. Our legal team could help you handle this issue immediately. The Tax Law Offices of David W. Klasing has worked with many clients on foreign financial reporting matters, and our services are available to you. To arrange a confidential consultation about your FBAR reporting requirements, call our law offices at (800) 681-1295. More information about the costs of consultation scheduling is available on our website.
Questions and Answers About Foreign Tax Audits
- Does the Fifth Amendment apply to foreign accounts?
- How is evidence cultivated from foreign sources?
- How is tax loss determined?
- How might an FBAR audit be resolved?
- Is a penalty assessment ripe for judicial review?
- Overview of an administrative criminal investigation
- What is the process of an FBAR referral?
- Statute of Limitations raised during a FBAR audit?
- Precautions to be taken in the pre-audit phase
- Recent international tax and reporting prosecutions
- Foreign account, entity and investment prosecution
- Who collects restitution and penalties?
- International tax investigations are an IRS high priority
