Under the Bank Secrecy Act (BSA), U.S. persons—encompassing citizens, resident aliens, and domestic entities—must file a Foreign Bank and Financial Accounts Report (FBAR) if their combined foreign financial accounts exceed $10,000 at any time during the calendar year. Formally known as FinCEN Form 114, the FBAR must be filed online through the BSA E-Filing System by April 15 (with an automatic extension to October 15). Failing to file, filing late, or making errors on an FBAR can trigger severe civil tax penalties and, in more egregious or “willful” cases, open the door to clandestine IRS-CI criminal tax investigations. Below, we examine how the Internal Revenue Service (IRS) uncovers FBAR violations, distinguishes between non-willful and willful misconduct, and enforces potentially staggering civil and criminal tax penalties against those who, at best, negligently fail to comply vs those, at worst, who are deemed to be willfully noncompliant.
Identifying FBAR Violations
The FBAR requirement aims to prevent money laundering, tax evasion, and other illicit activities by compelling U.S. taxpayers to disclose their global financial interests. Qualifying foreign accounts typically include bank accounts, securities accounts, commodity futures/options, and certain insurance or annuity policies with a cash value. Entities such as foreign hedge funds and purely virtual currency holdings are currently outside the FBAR’s scope, although regulations may change in the near future. If you share an account with another U.S. person, each co-owner must file separately unless certain spousal exceptions apply.
The IRS typically discovers unfiled or incorrect FBARs by:
- Tax Audits and Examinations: Agents scrutinize returns for unreported offshore income or missing FinCEN Form 114.
- International Information-Sharing: Through FATCA and intergovernmental agreements, foreign banks provide account data to the IRS.
- John Doe Summonses: Wide-ranging subpoenas to foreign institutions or crypto exchanges can unearth previously unknown U.S. account holders.
- Corporate Transparency Act (CTA): Effective 2024, certain U.S. entities must disclose beneficial ownership details to FinCEN, further tightening oversight of offshore assets.
Once alerted, the IRS investigates whether the taxpayer’s noncompliance stems from a non-willful oversight or willful concealment—a vital distinction in determining civil and criminal tax penalties. Rare but exponentially more intense if aggravating factors (e.g., deliberate fraud, money laundering, repeated false statements) prompt a criminal referral to IRS-CID. The IRS-CID boasts a 92%+ conviction rate in criminal tax cases, which refers to the DOJ, making early, strategic legal representation critical if you suspect your audit might escalate to a criminal tax matter.
How the IRS Asserts FBAR Penalties
FBAR penalties fall into two primary categories:
Non-Willful Violations
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- Penalty: Up to $10,000 per year for each FBAR violation. Under the Supreme Court’s Bittner decision, the penalty is typically assessed per report rather than per account.
- Removal of Mitigation Guidelines: The IRS previously applied mitigation measures to reduce non-willful fines, but these guidelines were eliminated, giving examiners broader discretion in determining final amounts.
- Reasonable Cause Defense: Taxpayers with credible explanations for late or incomplete filing (e.g., incorrect advice from a preparer) may qualify for penalty waivers.
Willful Violations
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- Penalty: Potentially 50% of the highest account balance (or $100,000, whichever is greater) per year, which can stack across multiple years if the IRS finds you intentionally or recklessly concealed foreign accounts. Such a violation can trigger an invasive IRS audit or criminal tax investigation, requiring you to produce several years of financial documentation.
- Criminal Tax Liability: If the IRS believes the taxpayer intentionally concealed foreign income, it may recommend felony charges that can result in fines, restitution, and up to five years in prison.
A taxpayer’s conduct is deemed “willful” if they either knew about the FBAR obligation or acted with reckless disregard for it. Evidence such as repeated omissions, false statements, or complex offshore structures can strengthen the IRS’s case for willful misconduct. Rare but exponentially more intense if aggravating factors (e.g., deliberate fraud, money laundering, repeated false statements) prompt a criminal referral to IRS-CID. The IRS-CID boasts a 92%+ conviction rate in criminal tax cases, which refers to DOJ, making early, strategic legal representation critical if you suspect your audit might escalate to a criminal matter.
Note: As long as a taxpayer that has willfully committed tax crimes (potentially including non-filed returns coupled with affirmative evasion of payment) self-reports the tax fraud (including a pattern of non-filed returns) through a domestic or offshore voluntary disclosure before the IRS has started an audit or criminal tax investigation/prosecution, the taxpayer can ordinarily be successfully brought back into tax compliance and receive a nearly guaranteed pass on criminal tax prosecution and simultaneously often receive a break on the civil penalties that would otherwise apply.
Don’t Risk Penalties: Ensure Proper FBAR Filing with the Tax Law Offices of David W. Klasing
Assessing your foreign account and asset reporting obligations can be extremely complicated. Don’t risk steep civil and criminal penalties—or, in the worst-case scenario, criminal tax prosecution—by failing to file an accurate FBAR. If you qualified for FBAR filing in previous years but neglected to submit one, or if your submitted report was incomplete or misleading, your best move is to consult a dual-licensed Tax Attorney and CPA at Tax Law Offices of David W. Klasing as soon as possible. The longer you delay, the higher the odds that the IRS will detect your noncompliance and initiate an audit or criminal investigation. Once such an audit or investigation has already started, this will severely limit our ability to mitigate the damage. At that point, we will have to focus on defending an eggshell audit or defending against a criminal investigation to try to prevent criminal charges from being filed against you and minimize the financial damages.
If you get in touch with us prior to the audit or investigation beginning, however, we may be able to get you into a voluntary or streamlined disclosure program, or even just amend your returns if the mistake was minor, unintentional, and recent. Voluntary and streamlined disclosure programs provide taxpayers with a pathway to correct past FBAR oversights in exchange for greatly reduced fines and a virtual assurance of avoiding criminal charges. The choice of which program is most suitable often hinges on whether the noncompliance was willful and on whether you are a domestic or expatriate taxpayer. As always, it is best to seek guidance from an experienced dual-licensed Tax Attorney & CPA—like those at the Tax Law Offices of David W. Klasing—before amending your returns or entering any disclosure program. We can assess potential risks, advise on the likely outcomes, and steer you through the intricate submission process. To schedule a reduced-rate FBAR consultation, call us at 888-640-3408 or contact us online today.
