Taxpayers with foreign bank accounts are required to disclose these accounts under the Foreign Account Tax Compliance Act (FATCA) and on the Report of Foreign Bank and Financial Accounts (FBAR). Do you have an overseas bank account you haven’t disclosed it to the IRS? If so, you are risking significant penalties and even possible criminal prosecution in certain cases.
Fortunately, there are a number of options for disclosing your offshore accounts. Each disclosure method has its own specific requirements and fees, some of which are substantial. But by disclosing your foreign bank accounts, you can avoid the even bigger penalties associated with a failure to file FBARs, which should make easier for you to sleep at night.
Who Must File FBARs
In general, if the total value of your foreign accounts exceeded $10,000 at any time during the year, you are probably required to file an FBAR. This includes accounts you have a financial interest in or signature authority over.
You may also have to file a Form 8938, Statement of Specified Foreign Financial Assets. The asset thresholds are higher for this form, starting at $50,000. If you file married filing jointly or if you live outside of the United States, higher thresholds apply.
If you have income from your foreign accounts, such as interest income, you must also report this income on your tax return. Part III of Schedule B specifically asks about foreign accounts, so make sure you file out this section of your tax return accurately.
Penalties for Failure to File FBARs
The penalties for a failure to file FBARs are harsh. If the IRS determines your violations non-willful, you could face a penalty of up to $12,459 per violation per year. Each unreported foreign accounts is considered to be a separate violation. Therefore, the penalties could really add up.
For example, if you have three foreign bank accounts and failed to file an FBAR for the past three years, that would be nine total violations, for a maximum penalty amount of $112,131.
If your violations are considered willful, the penalties become much more severe. The penalty may be the greater of $124,588 or 50 percent of the balance in the account for each violation. Additionally, you could face penalties for a failure to file 8938 or report foreign income.
Options for Disclosing Undisclosed Offshore Bank Accounts
If you’re wondering if there is a way to avoid these massive FBAR penalties, you have three options for disclosing your foreign accounts. Each has its own benefits and drawbacks. You should consult with a tax professional to make sure you choose the right disclosure option.
First, you can just submit the delinquent FBARs for all the years you should have filed them. This is the easiest offshore disclosure method but it has its risks. You’ll need to submit a reasonable cause statement with your FBARs, explaining why the returns are late. If the IRS doesn’t accept your reason, you could be in trouble.
Second, you can use the Streamlined Compliance Procedures. This program requires you to submit a relatively small penalty fee of five percent of the aggregate value of your foreign accounts. If you live outside the U.S., the IRS waives the fee.
However, you can only use the streamlined procedures if you certify that your failure to file FBARs was non-willful. If you use this program, but the IRS decides that your non-compliance was willful, you could face penalties and criminal prosecution.
The last disclosure option is the safest, but also the most expensive. If your FBAR non-compliance was willful, you can use the Offshore Voluntary Disclosure Program (OVDP). You’ll have to submit a penalty amount of 27.5 percent of your aggregate foreign account balance, which could be a hefty payment.
Choose the Right Offshore Disclosure Option
One of the big issues you’ll have to decide is whether your failure to file FBARs was willful or non-willful. This is a high-stakes decision, so you should talk to a tax professional with offshore disclosure experience to get some help.
If your actions were non-willful, use the Streamlined Compliance Procedures or the reasonable cause statement. But neither of these options offer you protection from criminal prosecution if the IRS decides you willfully failed to file FBARs.
The OVDP is costly, but it’s the only disclosure option you can use if your FBAR non-compliance was willful. It’s also the only offshore disclosure method that offers you immunity from criminal prosecution.