FBAR – What is FBAR? How does FBAR effect my taxes?
Are you scared that you may be delinquent in reporting your foreign bank and financial accounts reports (FBAR)? Questions regarding whether you have to disclose or whether you should disclose? The best way to answer these questions is to consult with an experienced FBAR attorney. FBAR issues can be simple and some can be pretty complex. One universal consensus though is that FBAR requirements are often misunderstood leading to many reporting errors.
FBAR filings are on the rise as FATCA and other international compliance efforts have raised awareness among taxpayers with offshore assets. The Foreign Account Tax Compliance Act (FATCA), which was passed as part of the HIRE Act, generally requires that foreign financial Institutions and certain other non-financial foreign entities report on the foreign assets held by their U.S. account holders or be subject to withholding on payments subject to withholding. The HIRE Act also contained legislation requiring U.S. persons to report, depending on the value, their foreign financial accounts and foreign assets.
- Do I have to report and file FBAR? What are the requirements?
Many U.S. taxpayers have foreign financial accounts (investments, pension, banking, etc.), but know that if you do, you may have to report these accounts to the U.S. Treasury Department’s Financial Crimes and Enforcement Network (FinCEN) or face some hefty penalties.
So, who must file an FBAR? A United States person that has a financial interest in or signature authority over foreign financial accounts must file an FBAR if the aggregate value of the foreign financial accounts exceeds $10,000 at any time during the calendar year.
Reportable assets include the following:
- deposit and custodial accounts held at foreign financial institutions
- certain foreign stock and securities
- foreign mutual funds
- foreign-issued life insurance or annuity contracts with a cash value
- other types of offshore assets
There are two forms that taxpayers who have foreign financial accounts or assets may have to submit. The first form is FinCen Form 114, Report of Foreign Bank and Financial Accounts. It is submitted separately from the tax return and can only be electronically filed. It is due April 15 of each calendar year but you can get an automatic extension to October 15.
The second form, is Form 8938, Statement of Foreign Financial Assets, which has been in existence since 2011, as part of the new FATCA legislation and is included in the tax return.
Just be aware of these common mistakes made on FBAR filings:
- The $10,000 amount applies to the total of all of your foreign accounts, not just a single account and;
- Life insurance policies, pension funds and inherited money are also subject to declaration.
It is important to know that if you have errors on your FBAR filing, you can still correct or file FBAR forms.
- How do I file FBAR forms that are delinquent
If you are late, there are three ways to file FBAR forms:
File them yourself online
You can file FinCEN Report 114 online if: (1) you did not know you had to file FBAR forms, or if there was a good reason why you didn’t; (2) you already reported on your US tax returns and paid tax on the income from all of the foreign financial accounts to be named in your FBAR and (3) you are not under civil examination or investigation by the IRS, and you have not been contacted by them about any late FBARs.
Use streamlined filing procedures
If it is determined that your failure to report financial accounts and assets was non-willful, the streamlined procedure is an acceptable option. Be careful here because if there is any conduct that may show willfulness, it can expose the taxpayer to civil and criminal liabilities if filed in this manner.
To clarify, use streamlined procedures if:
- you unknowingly skipped declarations of your foreign assets and accounts.
- you have made mistakes with filing FBAR forms in the past.
- you have not already reported all your US tax returns and paid tax on the income from all of the foreign financial accounts to be reported in your FBAR declaration.
The streamlined filing procedure allows you to report or amend three years of tax returns and six years of delinquent FBAR statements without incurring a penalty. (See IRS instructions for streamlined filing procedures)
If the IRS has initiated a civil examination of taxpayer’s returns for any taxable year, regardless of whether the examination relates to undisclosed foreign financial assets, the taxpayer will not be eligible to use the streamlined procedures. Similarly, a taxpayer under IRS criminal investigation is also ineligible to use the streamlined procedures.
Enter the Offshore Voluntary Disclosure Program (OVDP)
If your decision not to file was “willful,” then the Offshore Voluntary Disclosure Program is most likely the best option. In picking this option, the IRS allows you to declare everything that you knew you had to report, but didn’t and in return, the taxpayer will not face IRS criminal prosecution or substantial penalties.
In order to make the OVDP voluntary disclosure, it must be (1) truthful, (2) timely and (3) complete. You must:
- complete Form 14452, Foreign Account or Asset Statement.
- review your Offshore Voluntary Disclosure Letter and Attachment.
- evaluate and sign the Consent to Extend the Time to Assess Civil Penalties provided by 31 U.S.C. 5321 for FBAR Violations. (see more regarding OVDP forms and procedures on the IRS website)
If you enter this program you must submit the last eight years of tax returns.
- Am I subject to tax penalties or criminal penalties for failure to file FBAR?
Failing to file an FBAR can carry a civil penalty of $10,000 for each non-willful violation. But if your violation is found to be willful, the penalty is the greater of $100,000 or 50 percent of the amount in the account for each violation. Each year not filed is a separate violation. (see IRS guidance and procedures applicable to FBAR cases)
Criminal penalties for FBAR violations can include a fine of $250,000 and five years of imprisonment. If the FBAR violation occurs while violating other laws, the penalties are increased to $500,000 in fines and/or 10 years of imprisonment.
If you decide to opt for the streamlined process, there is a possible five percent penalty on foreign accounts.
If you enter the OVDP program, there is a twenty percent accuracy penalty on all taxes and even worse, there is a mandatory miscellaneous Title 26 offshore penalty of 27.5% on the highest account balance for the prior eight years.
The IRS will not impose a penalty for the failure to file the delinquent FBARs if you properly reported on your U.S. tax returns, and paid all tax on, the income from the foreign financial accounts reported on the delinquent FBARs, and you have not previously been contacted regarding an income tax examination or a request for delinquent returns for the years for which the delinquent FBARs are submitted.
Taxpayers needing assistance in dealing FBAR and reporting of foreign accounts and should seek the advice of a knowledgeable tax FBAR attorney. The Los Angeles Tax Attorneys at Delia Law have many years of tax fraud experience and will competently represent you before the IRS. Please call for a no-cost tax attorney consultation for tax resolution at (310) 494-0100. We look forward to helping you.
This blog post is not intended as legal advice and should be considered general information only.
Keywords, FBAR, FBAR Penalties, Offshore Voluntary Disclosure Program, Streamlined Filing Procedures, Foreign Bank and Financial Accounts, FBAR Attorney