The FBAR filing requirement is an important obligation for US taxpayers with foreign accounts. failure to comply with the filing times for the FBAR can result in serious financial consequences.
It is crucial for U.S. taxpayers who possess foreign financial accounts to comply with FBAR filing requirements. If you fail to submit an FBAR, you could face severe consequences, including substantial financial penalties, potential imprisonment, and loss of account funds. Luckily, there are numerous alternatives available to rectify non-compliance. These programs allow taxpayers to fix their errors and avoid the harsh consequences of non-compliance.
To receive your free case review with our FBAR tax lawyers, contact McCormick Tax Law by calling (215) 630-0861.
What Are the Penalties for Failing to File the FBAR on Time?
Not filing the Report of Foreign Bank and Financial Accounts (FBAR) can lead to different types of penalties. FBAR violations are classified into two categories: willful and non-willful. Depending on the case, a warning letter might be the only penalty for a violation. On the other hand, in some cases, perpetrators can be penalized with a 50% penalty on their maximum account value per year.
Civil penalties are usually imposed on those who file their FBARs late or not at all. To determine the penalties you are facing and how to avoid them, working with our international tax attorneys is highly recommended. Criminal penalties are uncommon but might be imposed in cases of willful failure to file an FBAR. These penalties are typically applied in cases where taxpayers are already being investigated for other crimes such as money laundering, tax evasion, structuring, and smurfing.
Penalties for Non-Willfully Failing to File the FBAR
Non-willful penalties are more commonly imposed, and the assessment and enforcement of penalties for non-willful violations can vary. If you commit a non-willful violation, you might face several penalties, with the lightest being a warning letter from the government. You could also be assessed a $10,000 fine that covers all violations for all years, a $10,000 fine per year for the violations committed, or a $10,000 fine per violation per year.
However, the definition of non-willful is not precisely defined, and the IRS examines the totality of the circumstances when determining whether a violation was non-willful. If you have been charged with a non-willful FBAR violation, the facts of your case will need to be reviewed to determine if the government will agree that your late filing was unintentional.
The year 2023 witnessed an important development in tax law as the Supreme Court agreed to address a crucial question regarding the non-willful penalty for FBAR violations. Specifically, the court was tasked with determining whether the penalty should be imposed on a per form or per account basis.
This decision would have significant implications for individuals and businesses with multiple foreign financial accounts, as the per account basis would result in higher penalties compared to the per form basis. Those who stood to benefit from the government collecting more substantial proceeds were in favor of the per account basis, while those representing the interest of individuals and businesses with foreign accounts argued for penalization on a per form basis. It will be important to review your case to see how the Supreme Court’s future ruling will affect your case.
Penalties for Willfully Failing to File the FBAR
FBAR penalties can be imposed if a taxpayer fails to comply with their FBAR obligations. When the Internal Revenue Service (IRS) determines that the violation was willful, the penalties can be more severe. Interestingly, the government does not have to prove that the mistake was made intentionally to determine that it was willful. A violation can be considered willful if the perpetrator shows a reckless disregard for their FBAR filing requirements.
Even if the perpetrator did not have actual knowledge of their FBAR violation, they might still be subject to a willful penalty. For example, foreign financial account holders who were willfully blind to their mistakes might receive such penalties. Sadly, there is no clear test to determine if someone’s violation was willful.
In general, it is best to avoid FBAR violations altogether. If you are unsure about your FBAR requirements, our team is here to help. We can assist you in avoiding mistakes that could result in the assignment of FBAR penalties.
It is crucial to report any foreign accounts holding substantial funds to avoid harsh penalties. Failure to do so might result in the IRS pursuing criminal charges against you. If you’re found guilty of intentionally not filing FBAR, you could face fines of up to $250,000 and imprisonment for up to 5 years in a federal prison.
Are There Amnesty Programs for Failing to File the FBAR on Time?
In case you filed the FBAR late or you think there was an error when you filed it, there are several FBAR amnesty programs provided by the IRS that you might be able to use. However, the programs available to you will vary based on the reason for not complying. In general, this will depend on whether the mistake was made intentionally or was non-willful.
Voluntary Disclosure Program
The aim of the Voluntary Disclosure Program (VDP) is to provide support for taxpayers who have knowingly failed to comply with tax laws. By submitting a comprehensive and timely VDP, the taxpayer’s circumstances can be assessed by the IRS, and they might determine appropriate penalties. In some instances, this can prevent the filing of criminal charges against the taxpayer. This disclosure option is typically the best choice for taxpayers who cannot declare their non-willfulness under penalty of perjury.
Streamlined Domestic Offshore Program
The Streamlined Domestic Offshore Procedures (SDOP) were created by the IRS to help taxpayers who have undisclosed foreign income, assets, accounts, and investments become compliant with IRS regulations. This program is specifically designed for individuals who are not considered foreign residents, filed their original tax returns on time, and were not willful in their non-compliance.
SDOP provides eligible taxpayers with an option to pay a 5% Title 26 Miscellaneous Offshore Penalty instead of facing other FBAR penalties. However, proving reasonable cause can be helpful for both U.S. and foreign residents, as it can help them avoid the 5% penalty imposed by SDOP. This is especially useful for individuals who do not qualify for the delinquency programs.
Reasonable is determined by the IRS, which reviews the evidence to determine whether a person has willfully violated the FBAR filing requirements. Compliant individuals have the possibility of having all penalties on their tax and assets accounts waived in full by participating in the SDOP program.
Streamlined Foreign Offshore Program
Taxpayers also might have the option to participate in the Streamlined Foreign Offshore Program (SFOP) offered by the IRS. This program allows certain individuals to file amended or original tax returns for up to three years and submit an FBAR FinCEN Form 114 for up to six years.
To be eligible, taxpayers must certify that they were not willful in their actions and must not currently be under an IRS audit under penalty of perjury. In addition to meeting eligibility criteria, participants in SFOP must file the necessary tax documents and reporting forms and pay all mandatory taxes and penalties.
Our FBAR Tax Attorneys Are Here to Help You
For a free assessment of your case with our expatriation tax attorneys, call McCormick Tax Law at (215) 630-0861 today.