Dealing with Delinquent FBARs – The Solution May Be Easier than You Think
If you are a U.S. citizen or resident with an offshore account and have been delinquent in filing the FBAR , a relatively painless solution may be available to you. But before we get to the good stuff, let’s start with a quick overview of the FBAR filing requirement.
What is the FBAR?
In brief, any U.S. account holder (person or entity) with a financial interest in or signature authority over one or more foreign financial accounts, with more than $10,000 in aggregate value in a calendar year, must file a Foreign Bank and Financial Account Report (“FBAR”) annually with the Treasury Department.
The FBAR filing is due by June 30th of each year, and extensions are not allowed. The FBAR form (FinCEN Form 114) must be filed electronically using the BSA E-Filing System maintained by the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (“FinCEN”).
What are the penalties associated with FBAR delinquency?
In general, a non-willful failure to report foreign bank accounts can result in a penalty of $10,000 per account unless there is reasonable cause for failing to file. A willful failure to file could be subject to civil penalties equal to the greater of $100,000 or 50% of the balance in each unreported account.
In this regard, the IRS recently issued interim guidance to examiners for implementing procedures to improve the administration of the FBAR. According to the guidance, the purpose of the FBAR penalty provisions is to establish maximum penalty amounts, leaving the IRS with the discretion to determine the appropriate FBAR penalty amount below the maximum threshold based on the facts and circumstances of each particular case.
For cases involving multiple non-willful violations, the memorandum advises IRS examiners that it may be appropriate to apply one penalty for each open year, regardless of the number of unreported foreign financial accounts. In such case, the penalty for each year would be limited to $10,000. For even less egregious cases, the facts and circumstances may indicate that asserting non-willful penalties for each year of delinquency may not be appropriate. In such case, the examiner may assert a single penalty for all years of delinquent FBARs, which is not to exceed $10,000, or even consider waiving all penalties and instead issue a warning letter (known as Letter 3800).
If you’ve been FBAR delinquent, what is your best option?
For eligible taxpayers, the IRS is currently offering the option of participating in the Delinquent FBAR Submission Program (DFSP). The DFSP offers delinquent taxpayers an easy process though which they can submit missing FBARs without being subject to penalties. Under the program, one would be required to submit missing FBAR filings going back six years while including a brief statement explaining why the FBAR were filed late. In order to be eligible for the program, the taxpayer would need to meet the following criteria: (i) the taxpayer is not required to submit missing or amended tax returns; (ii) the taxpayer is not under a civil examination or a criminal investigation by the IRS; and (iii) the taxpayer has not already been contacted by the IRS regarding their delinquent FBARs.
Assuming the taxpayer meets the above criteria, the IRS has stated that it will not impose a penalty for the failure to file the delinquent FBARs.
For many FBAR delinquent taxpayers, the simple catch-up program provided by the IRS is a great way to prevent potentially disastrous outcomes that could otherwise result from nondisclosure. However, depending on the facts and circumstances, a taxpayer may fail one or more of the program’s eligibility requirements and have to look at other potential solutions.
The team at Expat Tax Professionals has extensive experience helping FBAR delinquent taxpayers come into compliance with their reporting obligations. We can help you determine which program is best for your particular case, so that you can put past delinquencies behind you for good.
by Joshua Ashman, CPA