Due to the Bank Secrecy Act, U.S. persons are required to report foreign financial accounts to the Internal Revenue Service. However, there are many cases where a taxpayer could willfully or incidentally forget to report their foreign financial income. When this happens, the taxpayer could be subject to several penalties depending on the circumstances of their case. If you violated foreign bank and financial account reporting (FBAR) regulations, you should consult with an experienced dual-licensed California Tax Attorney and CPA as soon as possible.
At the Tax Law Offices of David W. Klasing, we are committed to ensuring that our clients are provided with superior legal service to accomplish their tax goals. We recognize the difficulty of complying with complex tax regulations, and we are here to address your concerns. To schedule a confidential consultation to discuss the details of your FBAR violation, call the Tax Law Offices of David W. Klasing at (800) 681-1295. You may also use our website to help schedule your consultation.
Requirements for FBAR Reporting to Avoid Violations
When a U.S. person possesses a foreign financial account, such as a bank account, mutual fund, foreign pension, foreign life insurance, or a brokerage account, they will be required to report income from that account to the IRS. For purposes of an FBAR, a U.S. person is considered as an American citizen, resident, corporation, partnership, limited liability company, and trust and estate. Specifically, the U.S. person must make an FBAR report under the following circumstances:
- A financial interest or authority held in at least one foreign financial account
- The total value of all foreign financial accounts exceeded $10,000 at any point during the calendar year
It is also important to note that a foreign financial account would still be subject to FBAR regulations even if it did not generate taxable income. Note, however, that a taxpayer does not have to file an FBAR for the following foreign financial accounts:
- Accounts owned by a governmental entity
- Accounts owned by an international financial institution
- Correspondent/Nostro accounts
- Accounts held in an individual retirement account you own, or in which you are listed as a beneficiary
This is not an exhaustive list. Our skilled California tax attorneys could help you determine when you are subject to FBAR reporting. To learn about the penalties for violating FBAR requirements, you should continue reading and contact the Tax Law Offices of David W. Klasing to discuss your case.
Calculating Penalties for Non-willful FBAR Violations
If you failed to meet the requirements for your FBAR reporting, you could be subject to a number of penalties. Penalties for FBAR violations are split into two categories: non-willful violations and willful violations.
The IRS has not developed a bright-line rule to determine when a taxpayer has made a non-willful FBAR violation. Instead, the IRS uses a totality of the circumstances test to determine the taxpayer’s intentions. A taxpayer facing a penalty for a potential non-willful violation may be asked some of the following questions by an IRS examiner:
- The aggregate value of nonreported foreign accounts
- Whether the taxpayer used a CPA or other tax professional to report their taxes and whether they asked about foreign accounts
- When the taxpayer learned of FBAR requirements
- Whether the taxpayer routinely files their taxes on time
This is not a comprehensive list. There are many other factors an IRS examiner may consider when determining whether a taxpayer had a willful violation of FBAR.
If a taxpayer has a non-willful violation of FBAR regulations, an IRS examiner will typically suggest that the taxpayer be subjected to one penalty per open year. Note that this penalty will likely be recommended even if the taxpayers have multiple unreported foreign financial accounts. Under these circumstances, the penalty for a non-willful violation will be limited to a maximum of $10,000. However, an IRS examiner can use their discretion and other guidelines to decide that a $10,000 fine is too severe in comparison to the violation.
If a taxpayer has multiple non-willful FBAR violations, there is still a chance that the IRS may approve a sole penalty of $10,000. However, after examining the taxpayer’s non-willful violation and the aggregate value of their unreported foreign account, the IRS examiner may recommend a more serious penalty after consulting with the Operating Division FBAR Coordinator. For example, the taxpayer may be subject to a separate penalty for each unreported account, and each year the accounts went unreported.
Note that the total amount of fines for non-willful violations cannot exceed 50% of the highest aggregate value of all unreported foreign accounts for the years in question.
Calculating Penalties for Willful FBAR Violations
When determining whether a taxpayer willfully violated FBAR regulations, the IRS does not require intent or knowledge of the violation. The IRS will primarily look at two factors:
- Reckless disregard by a taxpayer
- The willful blindness of the taxpayer
The penalties for willful FBAR violations are limited to the greater of $100,000 or 50% of the balance in the foreign account when the violation occurred. If a taxpayer has multiple willful violations in a span of numerous years, penalties may be imposed for each year a willful violation was found.
Similar to non-willful violations, the IRS examiner has the discretion to decrease the amount of the penalty depending on the circumstances of the case. Taxpayers could also be subjected to separate penalties for reporting and recordkeeping violations.
Like non-willful violations, the total amount of fines for non-willful violations cannot exceed 50% of the highest aggregate value of all unreported foreign accounts for all years under examination. The penalty for each year of a willful violation will be calculated by taking the total penalty amount for all willful FBAR violation years based upon the ratio of the highest aggregate balance for each year to the total of the highest aggregate balances for all years combined. The penalty will also have to remain under the limitations listed above.
Consult with Our Skilled California FBAR Violation Attorneys to Manage Your Tax Liability
If you are subject to FBAR regulations and failed to report your foreign income, you should consult with an experienced dual-licensed California Tax Attorney and CPA immediately. The Tax Law Offices of David W. Klasing could help you manage your FBAR reporting to help you avoid penalties for a willful or non-willful violation. To schedule a confidential legal consultation to discuss your FBAR reporting, call the Tax Law Offices of David W. Klasing at (800) 681-1295. You may also schedule a confidential consultation with our skilled California tax attorneys and CPAs online.
Questions and Answers about Offshore Voluntary Disclosure Initiative (OVDI)
- Why hire David W. Klasing to represent me in an audit
- 2011 Offshore Voluntary Disclosure Initiative FAQ
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- Case Resolution
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- What to do!
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Questions and Answers About Foreign Tax Audits
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- How is evidence cultivated from foreign sources?
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- Overview of an administrative criminal investigation
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- Recent international tax and reporting prosecutions
- Foreign account, entity and investment prosecution
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- International tax investigations are an IRS high priority
