Understanding FBAR Penalties and How Expats Can Avoid Them

If you have a financial interest in a foreign financial account, it may be a requirement for you to file a Report of Foreign Bank and Financial Accounts (FBAR) with the Financial Crimes Enforcement Work, a bureau of the Treasury Department. If you don’t file this report when it is due, the IRS can impose significant FBAR penalties. For this reason, it is important to understand FBAR filing requirements.  You should also ensure that you file all of your reports on time. If you are already in violation of FBAR filing requirements, you can minimize the damage and risk exposure to FBAR penalties by taking action to resolve any issues that you might have as soon as possible.

FBAR Filing Requirements

You must file an FBAR if you have a financial interest in one or more financial accounts located outside of the United States, and if the total value of these accounts was greater than $10,000 at any time during the tax year that you are filing. You may also need to file an FBAR if you have signature authority over foreign financial accounts with a total value over $10,000.

The IRS considers you to have “financial interest” in a foreign account if you are the owner of the account. This applies even if the account is for the benefit of another person. According to the IRS, you also have a financial interest in an account if the account’s owner is acting as your attorney, nominee or agent. For accounts owned by entities, financial interest exists if a U.S. person has more than 50 percent ownership or interest in the entity.

FBAR requirements apply to U.S. residents, U.S. citizens and all U.S. entities. An FBAR is required for qualifying accounts, even if your accounts don’t produce any taxable income during the year.

Filing the Report to Avoid FBAR Penalties

When filing an FBAR for a given tax year is a requirement, you must complete and submit the report no later than April 15 of the following year, so as to avoid FBAR penalties. The IRS requires these reports to be filed electronically through the BSA E-Filing System. To comply with IRS regulations, you must also answer all FBAR-related questions on your income tax return accurately. These questions include question 3 on Form 1041’s “other information” section, questions 6a and 6b on Form 1120 Schedule N, question 10 on Form 1065 Schedule B and questions 7a and 7b on Form 1040 Schedule B. In addition, you must pay all required taxes on any income that these accounts earn throughout the year.

Recordkeeping Requirements

In addition to filing an annual FBAR for qualifying accounts, the IRS also requires you to keep adequate records of your foreign financial accounts. These records must include the account number, the name on the account, the type of account, the name and address of the foreign entity maintaining the account and the maximum balance in the account during the period in question. The IRS requires you to keep a copy of this information for at least five years from the due date of the associated report. Keeping a copy of your filed FBAR and bank statements will typically satisfy this requirement and avoid any FBAR penalties.

Exceptions

Some exceptions to the FBAR reporting requirement exist. For example, this form is not a requirement for some trust beneficiaries, financial accounts owned by international financial institutions, financial accounts owned by a government entity and certain financial accounts owned jointly by spouses. To determine whether your foreign financial accounts qualify for one of these exceptions, it’s best to consult a tax professional, so as not to incur any FBAR penalties.

Extensions

In general, FBAR reports are due on April 15. However, if you fail to file your FBAR before April 15, you will receive an automatic extension with the deadline of October 15. You don’t have to specifically request this extension to receive it. Keep in mind that you won’t be filing your FBAR with your federal income tax return, and obtaining a deadline extension on your federal return won’t affect the FBAR’s due date.

FBAR Penalties for Failing to File

Failing to file an FBAR when it is a requirement, may lead to FBAR penalties that are of the civil and/or criminal nature, depending on the circumstances. The exact penalties you will face vary considerably, based on how the IRS categorizes your violation, as well as the evidence that is available.

Negligent Violation

When an entity fails to file an FBAR, the IRS may assess an FBAR penalty for a “negligent violation.” A violation may be considered negligent even if those in charge of the entity weren’t aware that they needed to file this form. For example, if the IRS believes that those in authority should have been aware of this requirement, the violation can still be considered negligent. This type of violation applies only to entities, such as corporations. It does not apply to individuals.

If an entity engages in a pattern of negligent violations, a greater FBAR penalty may be assessed. This additional penalty will be added to the basic penalty for negligent violations.

Non-Willful Violation

If you are an individual who has failed to file a required FBAR, the IRS may assess FBAR penalties for a non-willful violation. In most cases, the IRS categorizes a violation as “non-willful” if they believe you didn’t know about the requirement. However, if you do not know that you are supposed to file an FBAR, it won’t necessarily guarantee that the IRS will consider your violation non-willful. If the IRS believes you should have known, your violation may fall into a more serious category with more severe FBAR penalties.

Non-willful violations will not result in criminal penalties.

If the IRS considers your violation non-willful, you may be able to avoid paying any penalties if you meet certain requirements. You may be able to show that your violation was due to a reasonable cause and that you are willing to file all of the delinquent paperwork in a reasonable amount of time. In this case, the IRS may not assess any penalties for this type of violation. If the IRS chooses not to assess penalties, you will, however, receive a warning instead.

Willful Violations

If the IRS determines that you have willfully failed to file an FBAR and/or keep records of one or more foreign financial accounts, you will face much more serious consequences. The maximum civil penalty is significantly higher. Plus, criminal penalties for a willful violation may include a fine of up to $250,000 and up to five years in prison.

The IRS will consider your violation willful if they determine that you intentionally and voluntarily failed to uphold your legal duty. In most cases, this means that the IRS believes you knew a requirement to file an FBAR existed, yet you consciously chose to ignore the requirement. However, even if you aren’t aware of the requirement, your violation may still be considered willful. A concept known as “willful blindness” allows the IRS to charge you with a willful violation if they believe that you deliberately avoided learning about the FBAR requirement so you wouldn’t have to file the report.

Willful Violations That Occur While Violating Other Laws

If you willfully violate the requirement to file an FBAR or keep records of your foreign accounts while also violating certain other laws, your penalties may be assessed differently. The maximum civil penalty for this type of violation is $100,000 or 50 percent of the balance of the account at the time of the violation, whichever is greater. The criminal penalties for this type of violation may include a fine of up to $500,000 and up to 10 years in prison.

Willfully and Knowingly Filing a False FBAR

Penalties may apply even if you file your FBAR on time. If the IRS determines that you deliberately filed a false FBAR, your maximum civil penalty will be equal to $100,000 or 50 percent of the amount in the account at the time of the violation, whichever is greater. Criminal penalties for this violation may include an additional fine of up to $10,000 and up to five years in prison.

Avoiding FBAR Penalties

The best way to avoid penalties for failing to file an accurate FBAR is to be aware of the requirements and file an accurate and complete FBAR on time. However, if you have already failed to file an accurate FBAR before the required deadline, you may be able to take steps to reduce and/or avoid the associated civil and/or criminal penalties.

Filing Delinquent FBARs

If you are not already under a criminal or civil investigation conducted by the IRS, and the IRS hasn’t contacted you about your delinquent FBARs, you should file these reports as quickly as possible to reduce the chances of an FBAR penalty. You should also include a statement that explains why your report is late. In general, as long as you reported the income from the foreign financial accounts on your tax return and paid all of the associated taxes, the IRS won’t impose any penalties for your failure to file these reports in a timely fashion. As long as you continue to file FBARs on time for future tax years, the matter will be behind you.

Like all FBARs, file delinquent FBAR reports using the BSA E-Filing System. The front page of the provided electronic form will give you an opportunity to select a reason for your late filing. To avoid additional trouble with the IRS, be sure the delinquent FBARs you submit are accurate. If you need help completing this form, consider consulting a tax professional.

Reducing FBAR Penalties

The IRS is more likely to be lenient when you are proactive about filing your FBARs before they have noticed your mistake. However, if the IRS has already discovered the missing reports, or if you failed to report and/or pay taxes on the income from your foreign accounts, the IRS may assess FBAR penalties even if you file the delinquent FBARs and try to explain your mistake. In these cases, your goal will be to reduce your penalties as much as possible.

One of the most significant aspects of any FBAR investigation will be the classification of your violation as willful or non-willful. The FBAR penalties for non-willful violations are much less severe than those for willful violations. In addition, having your violation classified as non-willful will ensure that you avoid criminal penalties. However, the standards for determining whether a violation is willful or non-willful aren’t always very clear.

Regardless of the way the IRS classifies your violation, the exact FBAR penalties you will face is at the discretion of the examiner and/or the court. To reduce the severity of your FBAR penalties, you will need to collect evidence and prepare strong arguments to support your position.

Getting Professional Help With FBAR Filing

The potential FBAR penalties for failing to file an accurate FBAR are incredibly high, especially if the IRS believes you violated these regulations intentionally. For this reason, making sure that you are always in compliance with FBAR regulations is essential. One of the best ways to ensure compliance with these regulations is to consult a tax professional. A qualified tax professional will be able to tell you whether you need to file this report, and they will also be able to assist with the accurate filing of the report.

Even if you believe you may already be in violation of the IRS’ requirements with regard to FBARs, consulting a tax professional is still recommended. The sooner you file these reports, the less likely the IRS will be to impose the maximum penalty.

Seeking Legal Representation

If you are already under investigation for a violation of the IRS’ FBAR requirements, or if you think you may be the focus of an investigation by the IRS in the future, it may be in your best interest to talk to a lawyer who has experience with these matters. Hiring a lawyer is especially important if you are facing the possibility of criminal charges for your violations. An attorney will be able to help you explore all of your options and minimize any civil or criminal penalties associated with FBAR penalties.