Whether you were aware of it or not, since the 1970s, U.S. law has required the disclosure of foreign financial accounts by U.S. taxpayers under certain circumstances. A U.S. taxpayer is not only a U.S. citizen but also a Green-Card holder and a person who is deemed to be a taxpayer in any year in which he or she has met the substantial presence test (i.e., physically present for a certain number of days in the U.S. in a given year). Furthermore, residency in the U.S. is not required in order to be subject to the rules – citizens and green-card holders living outside of the U.S. are also subject to the disclosure requirements.
Failure to meet the disclosure requirements may subject a non-compliant taxpayer to sever civil penalties and in willful or fraudulent cases, may even mean criminal prosecution.
Over the past decade, the Internal Revenue Service has presented various voluntary disclosure opportunities where taxpayers may voluntarily take measures to become compliant and face reduced penalties (under some circumstances even elimination of the penalties) and avoid criminal prosecution. These programs are briefly outlined below. While significant resources can be found on the IRS website and websites like this one, it is imperative that before any action is taken, a qualified professional is consulted. Each case is unique in its facts and circumstances and a full legal analysis must be undertaken before determining the appropriate path to compliance and throughout the submission process.
It is important to note that in order to qualify for compliance under the various disclosure programs, a taxpayer must submit to the program before he or she becomes subject to an audit or examination. As such, once a taxpayer discovers that he or she was not in compliance, or if a taxpayer has been procrastinating, it is imperative that they recognize this “race” against the IRS and proceed to address the matter immediately – before it is too late.
At Dorot & Bensimon PL, we have guided hundreds of clients through the various processes to finality and adequate resolution. When choosing an attorney to represent you in this matter, nothing is more valuable than experience and we are here to help.
Who Must File an FBAR
United States persons are required to file an FBAR if:
- the United States person had a financial interest in or signature authority over at least one financial account located outside of the United States; and
- the aggregate value of all foreign financial accounts exceeded $10,000 at any time during the calendar year reported.
United States person includes U.S. citizens; U.S. residents; entities, including but not limited to, corporations, partnerships, or limited liability companies, created or organized in the United States or under the laws of the United States; and trusts or estates formed under the laws of the United States.
Exceptions to the Reporting Requirement
Exceptions to the FBAR reporting requirements can be found in the FBAR instructions published by the IRS. There are filing exceptions for the following United States persons or foreign financial accounts:
- Certain foreign financial accounts jointly owned by spouses
- United States persons included in a consolidated FBAR
- Correspondent/Nostro accounts
- Foreign financial accounts owned by a governmental entity
- Foreign financial accounts owned by an international financial institution
- Owners and beneficiaries of U.S. IRAs
- Participants in and beneficiaries of tax-qualified retirement plans
- Certain individuals with signature authority over, but no financial interest in, a foreign financial account
- Trust beneficiaries (but only if a U.S. person reports the account on an FBAR filed on behalf of the trust)
- Foreign financial accounts maintained on a United States military banking facility.
Review the FBAR instructions for more information on the reporting requirement and on the exceptions to the reporting requirement.
Reporting and Filing Information
A person who holds a foreign financial account may have a reporting obligation even when the account produces no taxable income. The reporting obligation is met by answering questions on a tax return about foreign accounts (for example, the questions about foreign accounts on Form 1040 Schedule B) and by filing an FBAR.
The FBAR is a calendar year report and must be filed on or before April 15 of the year following the calendar year being reported. Effective July 1, 2013, the FBAR must be filed electronically through FinCEN’s BSA E-Filing System.
The FBAR is not filed with a federal tax return. When the IRS grants a filing extension for a taxpayer’s income tax return, it does not extend the time to file an FBAR. Prior to the passing of the Surface Transportation and Veterans Health Care Choice Improvement Act of 2015, there was no provision for requesting an extension of time to file an FBAR. The Act mandates a maximum six-month extension of the filing deadline. To implement the statute with minimal burden to the public, FinCEN will grant filers failing to meet the FBAR annual due date of April 15 an automatic extension to October 15 each year. Accordingly, specific requests for this extension are not required.
Filers who submit FBARs jointly with spouses or who wish to have a third-party preparer file their FBARs on their behalf can use FinCEN Report 114a, Record of Authorization to Electronically File FBARs. FinCEN Report 114a is not submitted when filing an FBAR but, instead, is kept in FBAR records maintained by the filer and the account owner, and must be made available to FinCEN or IRS upon request.
Those required to file an FBAR who fail to properly file a complete and correct FBAR may be subject to civil monetary penalties. For penalties that are assessed after August 1, 2016, whose associated violations occurred after November 2,2015, the IRS may assess an inflation-adjusted civil penalty not to exceed $12,459 per violation for non-willful violations that are not due to reasonable cause. For willful violations, the inflation-adjusted penalty may be the greater of $124,588 or 50 percent of the balance in the account at the time of the violation, for each violation. For guidance on circumstances, including natural disasters, that prevent timely filing of an FBAR.
Note regarding civil penalty assessment prior to August 1, 2016: For those violations occurring on or before November 2, 2015, the IRS may assess a civil penalty not to exceed $10,000 per violation for non-willful violations that are not due to reasonable cause. For willful violations, the penalty may be the greater of $100,000 or 50 percent of the balance in the account at the time of the violation, for each violation.
Offshore Voluntary Disclosure Program
On January 9, 2012, the IRS reopened its Offshore Voluntary Disclosure Program following continued interest from taxpayers and tax practitioners after the closure of the 2011 and 2009 programs. This program offers people with unreported taxable income from offshore financial accounts or other foreign assets an opportunity to fulfill their tax and information reporting obligations, including the FBAR. Although the program does not have a closing date, the IRS may end the program at any time.
On March 13, 2018, the Internal Revenue Service announced that it will end the Offshore Voluntary Disclosure Program on September 28, 2018. After this date, the options for filing under this program will no longer be available and taxpayers will need to either use one of the Streamlined Programs or find other means through which to comply.
Streamlined Filing Compliance Procedures
On September 1, 2012, the IRS implemented new streamlined filing compliance procedures that were available only to non-resident U.S. taxpayers who failed to file required U.S. income tax returns. Taxpayer submissions were subject to different degrees of review based on the amount of tax due and the taxpayer’s response to a risk questionnaire.
On June 18, 2014, the IRS announced the expansion of these procedures. The expanded procedures are available to a wider population of U.S. taxpayers living outside the country and, for the first time, certain U.S. taxpayers residing in the United States. For eligible U.S. taxpayers residing outside the United States, all penalties will be waived. For eligible U.S. taxpayers residing in the United States, the only penalty will be a miscellaneous offshore penalty equal to five percent of the foreign financial assets that gave rise to the tax compliance issue.
Delinquent FBAR Submission Procedures
Taxpayers who have not filed a required FBAR and are not under a civil examination or a criminal investigation by the IRS, and have not already been contacted by the IRS about a delinquent FBAR, should file any delinquent FBARs according to the FBAR instructions and include a statement explaining why the filing is late. All FBARs are required to be filed electronically through FinCEN’s BSA E-Filing System. Select a reason for filing late on the cover page of the electronic form or enter a customized explanation using the ‘Other’ option.
The IRS will not impose a penalty for the failure to file the delinquent FBARs if income from the foreign financial accounts reported on the delinquent FBARs is properly reported and taxes are paid on your U.S. tax return, and you have not previously been contacted regarding an income tax examination or a request for delinquent returns for the years for which the delinquent FBARs are submitted.
U.S. Taxpayers Holding Foreign Financial Assets May Also Need to File Form 8938
Taxpayers with specified foreign financial assets that exceed certain thresholds must report those assets to the IRS on Form 8938, Statement of Specified Foreign Financial Assets, which is filed with an income tax return. Those foreign financial assets could include foreign accounts reported on an FBAR. The Form 8938 filing requirement is in addition to the FBAR filing requirement.