What is the FBAR?
The Foreign Bank Account Reporting Requirement — commonly referred to as FBAR — requires United States residents, citizens, and those who do business in the United States to report the maximum value of their foreign accounts to the Department of the Treasury if those accounts exceed $10,000 at any time in any given year. This report is not processed by the Internal Revenue Service, but instead by a different division of the Treasury Department, namely, the Financial Crimes Enforcement Network (FinCEN). Additionally, this report is not filed as part of the tax return, but instead is filed separately, with a due date of June 30th. As part of recent legislation, the due date will be changed to coincide with the due date for individual tax returns starting in 2017, for the 2016 tax year.
What is the Purpose of the FBAR Requirement?
The FBAR requirement was initially established by the Bank Secrecy Act in 1970. The purpose of the requirement is to obtain information that would presumptively be useful in investigations or proceedings related to criminal, tax, or regulatory violations. In 2001, the Patriot Act expanded the purpose to include protection against international terrorism. Since the amendment put an emphasis on this protection immediately following 9/11, the reporting requirements suddenly became a high priority for the government.
Why is Filing the FBAR Important?
Although seemingly mundane, the FBAR is extremely important because failure to comply can result in severe penalties, with a statute of limitations of six years. Failing to file the FBAR without any willful intent carries a $10,000 penalty per account per year. There is a reasonable cause exception to the penalty; still, it is difficult to obtain, and simply “not knowing” is not enough for someone to qualify. The civil penalty for a willful failure to file the FBAR is equal to the greater of $100,000 or 50% of the account balance for each violation, as well as potential criminal penalties. With a six-year statute of limitations, this penalty can easily become the greater of $600,000 or 300% of the account balance, in addition to a criminal monetary penalty and jail time.
What if the Deadline is Missed?
If FBARs have not been filed, there are a few options. Do nothing, file the FBARs late, make a “quiet disclosure,” or come forward under the Offshore Voluntary Disclosure Program (OVDP). It is not advisable to do nothing under any circumstances. The United States government has entered into information-sharing agreements with over 100 countries worldwide in order to obtain information relating to US taxpayers with foreign bank accounts, so it is unlikely that any foreign account will escape detection indefinitely. If all of the income from foreign accounts has been included on tax returns, it is possible to file the FBARs late without paying any penalty under the IRS’s Delinquent FBAR Submission Procedures. However, this is not an option for taxpayers who are already under investigation by the IRS, or who have already been contacted about the delinquent FBARs. Some taxpayers have made so-called “quiet disclosures” by amending their tax returns to include foreign income and filing the FBARs late. This course of action is not advisable as the IRS is actively pursuing taxpayers who have attempted to avoid penalties through this tactic. If foreign income has not previously been reported on tax returns and FBARs have not been filed, entering into the IRS’s Offshore Voluntary Disclosure Program can take advantage of a reduced penalty structure, and minimize the possibility of criminal prosecution. For many taxpayers where the failure to report is not willful, it is possible to come forward under the Streamlined Filing Compliance Procedures, which requires fewer amended tax returns than the Voluntary Disclosure program (and a more palatable miscellaneous offshore penalty).
Taxpayers in this situation are urged to discuss these matters with a tax attorney in order to determine if any failure to file was willful. Only the attorney-client privilege is sufficient to protect confidential communications from being used against a taxpayer in criminal proceedings.