4 Options for Delinquent FBAR Submission for Expats

The Report of Foreign Bank and Financial Accounts (FBAR) is a Treasury information form separate from your annual IRS income tax return. It requires U.S. persons, including expats, to report their involvement with foreign financial institutions (FFIs). The Bank Secrecy Act of 1970 mandates this filing for anyone with financial interests in or authority over foreign accounts that exceed $10,000 at any point during the calendar year. This includes accounts in foreign banks, brokerage houses, mutual funds, or other FFIs. Your involvement can be through signatory authority, such as in a business role, or personal financial interest. Failure to disclose offshore accounts when required to can have steep consequences. If you have a delinquent FBAR, you must address it as soon as possible to avoid further penalties and maintain compliance with IRS regulations.

The importance of disclosing foreign financial activities has grown significantly due to increased international data sharing, driven by agreements like the Foreign Account Tax Compliance Act (FATCA). Today, financial institutions worldwide must report information on accounts held by U.S. persons directly to the IRS, making timely FBAR filings more critical than ever.

There are essentially four routes for delinquent FBAR submissions for expats:

• Quiet Disclosure (typically not recommended)
• Delinquent FBAR Submission Procedures – if you’re up to date with your individual income tax filing requirements
• Streamlined Offshore Procedures – if you’re not up to date with your individual income tax filings, and you didn’t know you had to file (non-willful non-compliance)
• Voluntary Disclosure Practice – if you’re not up to date with your individual income tax filings, and you purposely failed to file required returns and disclosures (willful non-compliance)

In this article, we’ll look more closely into the different options and terms.

Who Should File an FBAR?

You must file an FBAR if you:

• Are a U.S. person (citizen, resident, or entity)
• Have one or more financial accounts in a foreign country at a Foreign Financial Institution
• Have financial interest in or signature authority over the foreign financial account(s)
• The aggregate (i.e. combined)  amounts in these accounts exceed $10,000 at any time during the year.

Why FBAR Quiet Disclosures are Discouraged

The IRS strongly discourages taxpayers from making “quiet” FBAR disclosures. This method involves filing delinquent FBARs and amended returns without formally notifying the IRS while paying any related tax and interest for previously unreported offshore income. Although it may seem tempting to avoid the penalties associated with voluntary disclosure programs (such as VDP or the Streamlined Domestic Offshore Procedures), the current regulatory environment makes it clear that quiet disclosures are not a safe option.

The IRS has openly stated that it knows taxpayers are attempting quiet disclosures. To date, many of these taxpayers have not received penalties or formal notifications from the IRS. However, this lack of response is not a guarantee for the future. The IRS could start issuing correspondence examinations for unfiled FBARs and unreported foreign income. This process is similar to how they compare returns with third-party information, like W-2s and 1099s, and issue CP2000 letters. Taxpayers making quiet disclosures should be aware of this potential risk.

The IRS’s Response to Quiet Disclosures

In 2015, the IRS launched the International Data Exchange Service (IDES). This system enables financial institutions and tax authorities in other countries to securely transmit reports on U.S. persons’ foreign financial accounts to the IRS in compliance with the Foreign Account Tax Compliance Act (FATCA) or intergovernmental agreements (IGAs). As of 2023, more than 200,000 financial institutions have registered through the IRS FATCA Registration System, and the U.S. has finalized over 113 IGAs with other countries.

The IDES system facilitates automated, standardized information exchanges between global tax authorities, making it easier for the IRS to detect previously hidden foreign accounts. This increased transparency will continue to ensure that taxpayers fully and accurately report their foreign financial assets, aiding the IRS in its enforcement efforts.

The Cost of Non-Compliance

The penalties for failing to file FBARs are severe, with civil penalties of up to $10,000 for non-willful violations and up to 50% of the account balance per violation for willful violations. These penalties can accumulate rapidly if multiple accounts or multiple years are involved. Moreover, criminal penalties and prosecution are possible for willful noncompliance.

Given the significant penalties, taxpayers should take action to comply with FBAR reporting requirements. The IRS offers several formal voluntary disclosure options to help taxpayers rectify past noncompliance:

• Delinquent FBAR Submission Procedure
• Streamlined Filing Compliance Procedures
• Voluntary Disclosure Practice (VDP)

These procedures provide a path to avoid harsher penalties and possible criminal prosecution. It is critical for taxpayers to act promptly to resolve any delinquent FBARs through voluntary disclosure before the IRS identifies them.

Taxpayers are strongly encouraged to make timely, accurate, and complete disclosures to minimize their risk. These options can help reduce penalties and protect against future examinations.

TIP: Penalties for non-willful violations of FBAR can sometimes be reduced or eliminated if you can demonstrate “reasonable cause” for the failure to file. This defense hinges on the quality of your explanation, including evidence that you were unaware of the requirement and took steps to comply as soon as you learned of your obligations.

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Delinquent FBAR Submission Procedure For Expats

If you have reported and paid taxes on all your taxable income, aren’t under IRS examination or investigation, and haven’t been contacted by the IRS regarding your FBARs, you may qualify to use the Delinquent FBAR Submission Procedure. This option is ideal if your only issue is failing to file FBARs and no unreported income. It’s important to note that this procedure is not suitable if you have any unreported income, even as little as $1 of interest income.

When you use this option, the IRS won’t impose a penalty for your late filings. However, you must include a detailed statement explaining why your FBARs are being submitted late. This explanation should be attached when you file the delinquent FBARs electronically. The IRS requires this step to assess the reason for your late submission and ensure compliance.

TIP: After filing your FBAR electronically, save a copy and keep the confirmation email. This can help resolve any issues if the IRS questions your filing in the future.

Streamlined Filing Compliance Procedures – Foreign and Domestic

The Streamlined Filing Compliance Procedures are designed for taxpayers who fail to report foreign financial assets or pay the associated taxes due to non-willful conduct. To qualify, you must certify that your failure to comply was not intentional and that you did not act willfully in failing to meet your obligations.

For U.S. residents using the Streamlined Domestic Offshore Procedure, the IRS imposes a Title 26 miscellaneous offshore penalty equal to 5% of the highest aggregate balance or value of your foreign financial assets during the covered tax return and FBAR periods. While this penalty can be significant, the streamlined procedures offer a key advantage. Taxpayers are not subject to accuracy-related penalties, information return penalties, or additional FBAR penalties—unless an IRS examination finds that your original return was fraudulent or that your FBAR violation was willful. The Streamlined Foreign Offshore Procedure, if qualified, is similar but has no offshore penalty assessment.

In contrast, if you opt for a quiet disclosure, you may face the full range of penalties, including those for inaccuracies, missed information returns, and FBAR violations.

A critical factor when using any streamlined disclosure procedure is ensuring your FBAR delinquency was genuinely non-willful. If you doubt whether your actions could be considered willful, seek professional advice.

What Is FBAR Willfulness?

FBAR willfulness refers to the intentional violation of a known legal duty. Courts define willfulness as knowingly failing to comply with a legal obligation, such as the requirement to file an FBAR. According to the IRS and the Internal Revenue Manual (IRM), your conduct may be considered willful if you knew you had a reporting obligation and consciously chose not to file. This means you knew that failing to file the FBAR was illegal, and you made a deliberate, voluntary decision not to comply.

The IRS must prove that you knew your duty to file FBARs. If they establish that you knew, your failure to file will be treated as a willful violation. However, ignorance of the FBAR filing requirement doesn’t necessarily shield you from penalties. The IRS may argue “willful blindness” if you deliberately tried to avoid learning about your obligations or if you attempted to conceal the existence of foreign accounts. Courts can infer willfulness from your conduct, particularly if your actions seem intended to hide financial information.

For example, foreign banks and financial advisors have increasingly informed account holders of their FBAR obligations, often through informal letters or more formal documents like Declarations of Consent. Ignoring such warnings could suggest willful non-compliance.

Voluntary Disclosure Practice (VDP)

The VDP allows taxpayers who willfully failed to report foreign financial assets to come forward and correct these issues. The program helps taxpayers avoid the risk of criminal prosecution, provided they meet the disclosure conditions. While the VDP offers protection from criminal charges, it does not guarantee immunity. The IRS evaluates each case based on its facts and circumstances.

Under the VDP, participants must submit a pre-clearance request using IRS Form 14457. The IRS Criminal Investigation (CI) unit reviews these requests to determine eligibility. If accepted, taxpayers must fully disclose their unreported assets, income, and any associated advisors. This must be followed by prompt cooperation during the examination phase. The goal is to reach a closing agreement, which typically involves paying back taxes, interest, and penalties.

The VDP penalty framework includes a civil fraud penalty for at least one year with the highest tax deficiency. This penalty replaces other accuracy-related and delinquency penalties. Additionally, willful FBAR penalties apply for cases involving foreign bank account reporting violations.

TIP: If you’re behind on multiple years of FBAR filings, it’s best to submit all delinquent FBARs at the same time. Filing only one year and waiting on the others could draw unwanted attention from the IRS and lead to additional penalties.

How to File a Delinquent FBAR For Expats

If you have failed to file FBARs, here are the steps to follow:

1. Seek Professional Guidance. FBAR filings, especially delinquent ones, are complex. We recommend that you consult with a tax professional experienced in expat tax matters to ensure compliance and avoid penalties.
2. Write a Letter of Explanation. When submitting a delinquent FBAR, include a letter detailing why your FBAR is late. The letter must explicitly state that the late filing was not due to tax evasion. It should also explain the reasonable cause for the failure to file.
3. Use the BSA E-filing System. You must submit all delinquent FBARs electronically through the BSA E-filing System. The IRS instructions for electronic submission are clear and straightforward, but FinCEN provides its helpline for additional help.

Getting Professional Help

The IRS has shown no signs of slowing down its enforcement efforts when it comes to foreign financial accounts. With the growing ease of international data sharing, it is more important than ever to ensure full compliance with FBAR reporting. Whether your failure to file was non-willful or willful, there is a path forward. The key is to act quickly and seek professional advice to avoid escalating penalties and legal consequences.

If you find yourself needing to file a delinquent FBAR, we encourage you to contact us at Tax Samaritan. We offer a personalized approach to help you resolve your tax issues and ensure you are in compliance moving forward.

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