As a taxpayer with unfiled FBAR reports (the FinCEN Form 114, formerly known as the TD F 90-22.1), once you learn about the filing obligations and the penalties for noncompliance, the next question most taxpayers have is “what to do about getting into compliance with filing the unfiled FBAR forms?”
The decision to how you choose to file your unfiled FBAR reports is ultimately up to you, the taxpayer, after educating oneself with the various options available and determining the level of acceptable risk.
Unfiled FBAR Forms – What To Do?
The reality nowadays with FACTA is that if you are an American with accounts overseas it is only a matter of time before the undisclosed foreign financial accounts and unfiled FBAR forms are discovered by the government – it may be this year or a few years from now or perhaps not at all. Nevertheless, the Foreign Account Tax Compliance Act (FATCA) requires foreign financial institutions to sort through their account base and disclose accounts with ties to the United States and at some point most, if not all, foreign financial institutions and countries will be sharing financial information.
Foreign financial institutions are reviewing their account databases to find all U.S. persons in order to comply with provisions of the Foreign Account Tax Compliance Act (FATCA). The result is that many American account holders are receiving communications from their foreign banks requesting proof of FBAR compliance and advising those account holders that their account information will be disclosed to the IRS.
Unfiled FBAR Filing Option One – Offshore Voluntary Disclosure Program (OVDP)
Several years ago the practice of just filing the late FBAR forms was a no-brainer because the chances of getting caught and assessed a penalty were very slim.
However, nowadays the IRS is encouraging more and more taxpayers with unfiled FBAR forms to enter the Offshore Voluntary Disclosure Program (OVDP) and attempting to identify taxpayers that didn’t enter the program, but should have.
A person who willfully fails to report an account or account identifying information may be subject to a civil monetary penalty equal to the greater of $100,000 or 50 percent of the balance in the account at the time of the violation. In addition, there can also be criminal penalties of up to $250,000 or 5 years in jail or both.
If a person has willfully failed to report and is engaging in a certain pattern of illegal activity, criminal penalties are increased up to $500,000 or 10 years in jail or both.
To determine willfulness with unfiled FBAR forms, the IRS will look at facts such as:
- Was the income from the foreign financial account reported on the income tax return?
- Was the box checked “Yes” or “No” at the bottom of Schedule B where the question “At any time during the tax year, did you have a financial interest in or signature authority over a financial account (such as a bank account, securities account, or brokerage account) located in a foreign country? “ is asked
- Were the bank statements for foreign financial account being sent to a U.S. address?
- Was the tax professional advised of the existence of the foreign financial account?
- Was there a valid reason for the maintenance of the account?
- Why was an account opened and maintained in a foreign country?
- What is the connection to the country where the bank account was opened and the taxpayer?
- Is the account in the name of the taxpayer or in the name of a trust or other offshore entity such as a foreign corporation?
Despite what you’ll hear from an attorney that will charge you $5,000 just to get started and to enter you into the program, it is incorrect that the OVDP is the only alternative. Just because you have unfiled FBAR forms is not reason enough to enter OVDP.
The biggest advantage of the OVDP is the dropping of criminal charges. While not filing already makes you a “criminal” in the eyes of the IRS, that can easily be defended as long as you were not intentionally, specifically going out of your way to hide these assets – and more importantly the taxable income it produces. So if all you did was not know about your filing requirement, there are other ways you can get out of the criminal charges. Although I must say that the only way to know for 100% sure no criminal charges will be brought up, the OVDP is the only route.
Of course with OVDP, the peace-of-mind you get by knowing that this will never come up again is a big plus. It’s a closed matter (if done properly). But you may want to weigh your options of penalty exposure on all of your filing options.
In a nutshell, if you do not think you have reasonable cause and there appears to be willfulness, then it is likely best to utilize the Offshore Voluntary Disclosure Program (formerly known as the Offshore Voluntary Disclosure Initiative or OVDI).
Unfiled FBAR Filing Option Two – Streamlined Filing Compliance Procedure
If you are eligible to be considered a taxpayer with a low compliance risk, the Streamlined Filing Compliance Procedure may be the best option.
For those taxpayers presenting low compliance risk, the review will be expedited and the IRS will not assert penalties or pursue follow-up actions. Submissions that present higher compliance risk are not eligible for the streamlined processing procedures and will be subject to a more thorough review and possibly a full examination, which in some cases may include more than three years, in a manner similar to opting out of the OVDP.
Taxpayers utilizing this procedure will be required to file delinquent tax returns, with appropriate related information returns (i.e. Form 3520 or 5471), for the past three years and to file delinquent FBARs (FinCEN Form 114) for the past six years. Payment for the tax and interest, if applicable, must be remitted along with delinquent tax returns.
While this guidance indicates that Americans living abroad could file 3 years back (6 years for unfiled FBAR forms), please note that this guidance is conflictive and does not address the issue of leaving years open for review due to the statute of limitations and it does not follow the current Internal Revenue Manual policy below:
Section 126.96.36.199 (10-05-2010) Enforcement Period – Policy Statement 5-133 (P-5-133), IRM 188.8.131.52.18, Delinquent returns—enforcement of filing requirements, discusses delinquent returns and the enforcement filing requirements. The enforcement period is not to be more than six years. See Section 184.108.40.206 (http://www.irs.gov/irm/part4/irm_04-012-001.html).
We recommend that all delinquent returns should be filed as there is no civil statute of limitations period for assessing tax on an unfiled return, but the IRS has a policy of securing no more than six years’ worth of returns.
This is ultimately a decision that you need to make, however we recommend filing any unfiled tax returns and unfiled FBAR forms for at least 6 years back if choosing this filing option.
Eligibility For The Streamlined Filing Compliance Procedure
This procedure is available for non-resident U.S. taxpayers who have resided outside of the U.S. since January 1, 2009, and who have not filed a U.S. tax return during the same period. These taxpayers must present a low level of compliance risk for their unfiled FBAR forms.
Amended returns submitted through this program will be treated as high-risk returns and subject to examination. If you need to file an amended return to correct previously reported or unreported income, deductions, credits, tax, etc. you should not use this streamlined procedure. Depending on your circumstances, you may want to consider participating in the Offshore Voluntary Disclosure Program.
The IRS will determine the level of compliance risk presented by the submission based on information provided on the returns filed and based on additional information provided in response to a Questionnaire required as part of the submission. Low risk will be predicated on simple returns with little or no U.S. tax due. Absent any high risk factors, if the submitted returns and application show less than $1,500 in tax due in each of the years, they will be treated as low risk and processed in a streamlined manner.
The risk level with the submission of unfiled FBAR forms may rise if any of the following are present:
- If any of the returns submitted through this program claim a refund;
- If there is material economic activity in the United States;
- If the taxpayer has not declared all of his/her income in his/her country of residence;
- If the taxpayer is under audit or investigation by the IRS;
- If FBAR penalties have been previously assessed against the taxpayer or if the taxpayer has previously received an FBAR warning letter;
- If the taxpayer has a financial interest or authority over a financial account(s) located outside his/her country of residence;
- If there is U.S. source income; or
- If there are indications of sophisticated tax planning or avoidance.
Unfiled FBAR Filing Option Three – Quiet Disclosure
In some cases however, such as where there is no unreported income, the OVDI is not necessary and a disclosure with an appropriate explanation statement for the filing of each unfiled FBAR form should be made.
While there is no published definition of “quiet disclosure” it has commonly accepted to mean amending tax returns to include previously unreported income related to unfiled FBAR forms.
While quiet disclosure may mean simply sending in your unfiled FBAR forms, there is no clear consensus on the definition and certainly no published definition by the IRS.
No doubt it is a difficult decision to make. Debating between making a full disclosure of your unfiled FBAR forms, or continue to hide, or something in between. Hiding is no longer an option. So with time running out and the chances of getting caught increasing, why are folks sitting on the fence? I think this is because of the assumption of “I won’t get caught”. And it is true, not everyone will get caught, but the odds of getting caught are continuing to increase and the risk is simply not worth it in my opinion. Taxpayers who do get caught face draconian penalties. No matter how you decide to file, making a decision to file is a “no-brainer”.
Tax Samaritan is a team of Enrolled Agents with over 25 years of experience focusing on the taxation of US taxpayers living abroad. This form has been in the news extensively due to the increased efforts by the IRS to bring taxpayers into compliance. Our services include preparing the unfiled FBAR forms (FinCEN Form 114) and exploring your filing options. We maintain this tax blog where all articles are written by Enrolled Agents. Our main objective is to educate Americans abroad on their tax responsibilities, so that they can look for planning alternatives on time. They are also designed to help taxpayers looking to self prepare, providing specific tips and pitfalls to avoid. If you found this article helpful, you’ll likely benefit from our future ones as well – so we encourage you to avoid pitfalls and join our mailing list:
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Randall Brody is an enrolled agent, licensed by the US Department of the Treasury to represent taxpayers before the IRS for audits, collections and appeals. To attain the enrolled agent designation, candidates must demonstrate expertise in taxation, fulfill continuing education credits and adhere to a stringent code of ethics.
Every effort has been taken to provide the most accurate and honest analysis of the tax information provided in this blog. Please use your discretion before making any decisions based on the information provided. This blog is not intended to be a substitute for seeking professional tax advice based on your individual needs.