An often overlooked filing obligation is the annual June 30 requirement to file the FBAR form for taxpayers with foreign bank accounts aggregating over $10,000. Late FBARs are a consistent problem and the IRS has a long history of complicated solutions. The latest (and greatest) is the “just file it!” approach, as long as the underlying taxes are all paid up and the government is not already investigating it.
Taxpayers who have reported and paid tax on all income, but haven’t filed required FBARs for prior years, have this relatively quick and easy compliance option (and one which generally avoids penalties altogether). Specifically, what such taxpayers need to do is file the delinquent FBARs with the IRS according to the form’s instructions and the Bank Secrecy Act’s E-Filing System along with a statement explaining why the reports are being filed late (the dog ate your homework is not a permitted excuse). The IRS will not impose a penalty for the failure to file the delinquent FBARs if there are no underreported tax liabilities and the taxpayer has not previously been contacted by the IRS regarding an income tax examination or a request for delinquent returns – to avoid penalties, taxpayers may want to file delinquent FBARs as soon as they are aware of the requirement, to minimize the chance that the IRS will begin an audit or independently request the FBARs.
What is an FBAR?
The FBAR filing requirement relates to foreing bank accounts and can come as an unwelcome surprise (often one or more years past the filing deadline). The filing requirement is broad, and applies to all “U.S. persons” (including U.S. citizens, U.S. residents, entities created or organized in the U.S. (or under the laws of the U.S.) and trusts or estates formed under the laws of the U.S.) who (1) have financial interests or signatory authority over at least one financial account located outside of the United States; and (2) the aggregate value of all foreign financial accounts exceeds $10,000 at any time during the calendar year reported. It doesn’t take much for U.S. persons with assets overseas to be subject to the FBAR requirements, and as a result it’s possible for taxpayers to be delinquent before they have even realized they are subject to the FBAR filing requirements in the first place.
Alternative solutions for late FBARs
Note that not all taxpayers can bring themselves into compliance by simply filing delinquent FBARs. Individual U.S. taxpayers who have failed to file required U.S. income returns and who want to resolve their tax and penalty obligations can take advantage of streamlined filing compliance procedures that were put in place in 2012, and substantially expanded in June 2014. These procedures are more time-consuming than simply filing delinquent FBARs, but they come with a significant benefit: the IRS will waive all penalties for taxpayers living outside the U.S. who participate in the streamlined filing compliance procedures, and taxpayers living within the U.S. will only be subject to a “miscellaneous” offshore penalty equal to 5% of the foreign financial assets that gave rise to the tax compliance issues.
The streamlined filing compliance procedures aren’t available to all taxpayers, and also don’t provide the added benefit of protecting taxpayers from criminal prosecution. Taxpayers with undisclosed foreign accounts and unreported income who cannot (or choose not to) take advantage of the streamlined procedures, and/or who are seeking protection from criminal prosecution as a result of their nondisclosure, can participate in the IRS’s offshore voluntary disclosure program (commonly referred to as “OVDP”). Taxpayers participating in OVDP pay a lump offshore penalty instead of a number of other penalties that could otherwise be assessed, and the OVDP also offers protection from criminal prosecution. This may be a good option for taxpayers who need it, but it is a more onerous process than simply filing delinquent FBAR forms. In order to participate in the OVDP, taxpayers must first request acceptance into the program. After acceptance, taxpayers must submit a significant amount of information to the IRS, including eight years of amended tax returns, FBARs, and information returns as well as information about their offshore accounts. In addition, taxpayers must submit full payment of the tax and interest due, and whatever lump offshore penalty has been assessed (although taxpayers who disagree with the amount of the assessed offshore penalty may choose to opt out of the civil settlement structure of the program; in such circumstances, the IRS will separately determine whether any penalty mitigation is appropriate under the facts and circumstances).
Taxpayers who find themselves in violation of the IRS’s FBAR filing requirements should take a step back and evaluate their options (here presented in a handy IRS chart). Depending on the facts, it might be possible to simply file delinquent FBARs with very little added effort – or, at the other extreme, a taxpayer may want to participate in OVDP in order to mitigate penalties and avoid any threat of criminal prosecution.