The Bank Secrecy Act was developed to prevent money laundering, terrorist financing, and misuse of financial institutions. One form that came out of this act was the Report of Foreign Bank and Financial Accounts (FBAR), which requires U.S. persons to declare their foreign bank accounts above a certain amount every year.
But what happens when someone fails to file their FBAR? Not filing an FBAR can lead to criminal actions and significant penalties, but if you’re proactive, you may be able to use the delinquent filing procedures to catch up on your filing requirements and avoid excessive penalties.
Keep reading for an overview, or contact us at Wiggam Law to get help now.
The FBAR only requires certain U.S. persons to file every year. For the purposes of this definition, U.S. persons include U.S. residents, U.S. citizens, domestic corporations, as well as certain trusts, and estates that are not foreign estates.
If the total sum of the person’s foreign accounts that they own, have a financial interest in, or signature authority over, ever met or exceeded $10,000 during the tax year, they must file an FBAR for that year. The FBAR is due on April 15 each year for the previous year, but if you miss that deadline, it is automatically extended to October 15.
While the FBAR does require that most foreign accounts be reported, certain accounts are excluded, including:
While an FBAR may not be required for some of these accounts, there are other reporting requirements that may apply. You should consult with an experienced international tax attorney if you have an interest in any foreign assets or accounts to ensure you are properly reporting them.
If the IRS discovers that you have not filed an FBAR and you were required to do so, they may require you to pay the penalties for a willful or non-willful violation, and could pursue criminal action.
Non-willful penalties assessed after January 25, 2024, are set at $16,117, adjusted up from $10,000 to account for inflation. Non-willful violations are those that occur because the account owner did not know and could not have been expected to know that they needed to file an FBAR. Most violations are non-willful. A recent Supreme Court case ruled that the penalties should be applied per return and not per account.
The penalty is much steeper for willful violations. The maximum penalty is either $161,166, which is adjusted from $100,000 for inflation, or half of the value of the unreported accounts, per unreported account. Options for Correcting Delinquent FBARs
There are several options available to U.S. persons who have foreign accounts in excess of $10,000 but have not filed FBARs. The first is streamlined filing compliance, which strives to help taxpayers who mistakenly failed to file even though they should have.
Within this program, there are two separate programs, the Streamlined Domestic Offshore Procedures and the Streamlined Foreign Offshore Procedures. The second is the Delinquent FBAR Submission Procedures. Both of these are discussed further below. Finally, there is an option to submit the returns and request a reasonable cause statement penalty waiver if you do not fit into one of the other programs.
An important note: one option that was previously available to taxpayers was the Offshore Voluntary Disclosure Program. That program ended at the end of 2018 and has not been revived since. There is a criminal voluntary disclosure program for willful failures to file FBARs and pay income tax. If you believe your violation was willful you should discuss with an attorney immediately to see if this is a good option for you.
Streamlined filing compliance procedures essentially allow someone to file their FBARs late (and, if applicable, pay the taxes associated with the undisclosed assets) by indicating that their violations were not due to willful conduct on their part.
If accepted into these programs, you would pay a reduced penalty or possibly no penalties at all, and the IRS will limit the returns that need to be corrected.
This option is only accessible to individual taxpayers and estates of individual taxpayers. Both U.S. persons living within the United States and those living abroad may follow these procedures. Other requirements include:
Note that the IRS indicates that returns and FBARs submitted under streamlined procedures may have their information cross-checked with information from financial institutions, financial advisors, and other sources. It is extremely important to ensure that your filings are accurate and complete.
People who have not filed their FBARs, are not under civil examination or criminal investigation by the IRS and have not been contacted about their delinquent FBARs may follow the Delinquent FBAR Submission Procedures.
Like all other FBARs, your delinquent FBARs must be submitted online via the BSA E-Filing System. You will need to provide a reason for why the return is filed late with the delinquent filing. You should consult with an experienced tax attorney before filing.
What about penalties? If income from the accounts on your delinquent reports was properly included on your tax returns—meaning you paid all taxes associated with those accounts—no penalties will be imposed. You must also not have undergone a tax examination or request for delinquent returns for the years in question.
Submitting a statement of reasonable cause essentially involves telling the IRS that you should not be charged penalties for your delinquent FBAR because you had reasonable cause to do so. You must be able to show that there were significant mitigating factors leading to your failure to file or events beyond your control that kept you from filing. Additionally, you must be able to prove that you acted in a responsible manner before, during, and after your failure to file.
What are the mitigating factors under this definition? Potential mitigating factors include:
Events beyond the filer’s control include an unavailability of business records for the time period in question and actions taken by the IRS or an IRS agent.
Note that the examples listed above are not an exhaustive list of reasons—the IRS will assess each reasonable cause letter on its own merits, not by checking its contents against a list.
What about the requirement to act in a responsible manner? An individual must have done what they could to determine their filing obligations and still fallen short, requested extensions if necessary to avoid delinquent filing, tried to prevent a failure if at all possible, and addressed the failure as quickly as possible.
Your statement should outline clearly for the IRS whether you had significant mitigating factors or issues outside of your control. You should then provide compelling evidence proving your case. You should also demonstrate how you met the requirement of acting in a responsible manner. For example, you may want to explain what you did to find out what forms you needed to file and how you took steps to rectify your delinquent filings as soon as possible.
In general, it’s best to avoid writing a letter yourself. While you may write a compelling letter, a tax attorney is better equipped to prove your case to the IRS. Once your letter is written, you can attach it to your delinquent filings.
Finding out that you are not in compliance with IRS laws is stressful, and no one who goes through this process wants to repeat it. How can you maintain accurate records to avoid a reoccurrence? Some best practices to consider include:
The stakes are high (and expensive) if the IRS realizes you have not been filing your FBARs. They can go back six years and assess penalties from all years if applicable. The IRS can pursue criminal actions as well. It’s in your best interest to address your delinquent FBARs as soon as possible. Not only does this give you a better chance of filing before the IRS begins a civil examination, but it also shows that you took reasonable steps to act in a responsible manner.
We understand that the options listed here can be overwhelming. You may not know which options are available to you or which option is best for your specific circumstances. If you’re feeling overwhelmed and frozen by all of the options you’ve read about, it’s time to talk to a tax professional. You want to avoid making mistakes that could cost you thousands of dollars in penalties, and you definitely want to avoid inaction when your standing with the IRS is in question.
If you’ve failed to file one or more FBARs, don’t panic. You have options, and odds are good that at least one is a good fit for you. Turn to the team at Wiggam Law to explore your options and take the first step toward compliance. To get help now, schedule a consultation or call us at (404) 233-9800.
