FBAR Late Filing Options
The implementation of FATCA and ongoing efforts to uncover FBAR late filing by the IRS, Treasury Department and U.S. government in general to ensure compliance with U.S. tax reporting requirements and disclosures has raised awareness with U.S. taxpayers in respect to foreign accounts that they may have financial interest or signature authority in.
With this raised awareness, many taxpayers are exploring their options available to get back into compliance with these requirements and address the inherent problems and risk with FBAR late filing. The IRS offers a number of options to address these failure to comply with the FBAR disclosure requirements which includes:
- Offshore Voluntary Disclosure Program (OVDP)
- Streamlined Filing Compliance Procedures
- Delinquent FBAR Submission Procedures
- Delinquent International Information Return Submission Procedures
Our links on the available FBAR late filing options provide additional details on each of these options. Because the facts and circumstances of taxpayers vary widely, it is truly not a one-size-fits all approach to the selection of an appropriate option. A number of factors should be evaluated, preferably with assistance with a professional firm such as Tax Samaritan, however the main factors are an evaluation of risk and potential penalties.
It is important to note that the last two FBAR late filing options are only applicable if the foreign income related to the foreign accounts has already been reported. There is no de minimis threshold for income, rather any income, whether interest income of only $1 or $10,000 must have been reported. If you have no reported all income from the foreign accounts, then you would need to look at one of the first two options. If you know that you have willfully failed to report and pay tax or if the IRS is likely to view your situation as a case of FBAR willfulness, then OVDP generally will be the recommended option. One of the streamlined filing compliance procedures is only a good option if there was not a willful failure to file.
OVDP (Offshore Voluntary Disclosure Program)
The OVDP is a voluntary disclosure program that caters to taxpayers that have exposure to potential criminal and civil penalties due to a willful failure to report foreign financial accounts and to pay all tax due in respect to those assets. OVDP is designed to provide taxpayers with protection from criminal penalties and terms for resolving their civil and penalty obligations for their FBAR late filing.
The OVDP program is clearly designed to encourage taxpayers to disclose foreign accounts rather than risk detection by the IRS and possible criminal prosecution. Under the terms of the Offshore Voluntary Disclosure Program, taxpayers must:
- Provide all documents required related to the FBAR late filing
- Cooperate in the voluntary disclosure process, including providing information on foreign accounts and assets, institutions and facilitators, and signing agreements to extend the period of time for assessing Title 26 liabilities and FBAR penalties
- Pay 20-percent accuracy-related penalties under IRC § 6662(a) on the full amount of your offshore-related underpayments of tax for all years
- Pay failure-to-file penalties under IRC § 6651(a)(1), if applicable
- Pay failure-to-pay penalties under IRC § 6651(a)(2), if applicable;
- Pay, in lieu of all other penalties that may apply to the undisclosed foreign accounts, assets and entities, including FBAR and offshore-related information return penalties and tax liabilities for years prior to the voluntary disclosure period, a miscellaneous Title 26 offshore penalty equal to 27.5 percent (or 50 percent in circumstances where either a foreign financial institution at which the taxpayer has or had an account or a facilitator who helped the taxpayer establish or maintain an offshore arrangement has been publicly identified as being under investigation or as cooperating with a government investigation.) of the highest aggregate value of OVDP assets during the period covered by the voluntary disclosure (the 27.5 percent and 50 percent penalties are referred to as the “offshore penalty”)
- Submit full payment of any Title 26 tax liabilities for years included in the offshore disclosure period, applicable interest, an offshore penalty, accuracy-related penalties for offshore-related underpayments, and, if applicable, the failure-to-file and failure-to-pay penalties or, if the taxpayer is unable to make full payment, make good faith arrangements with the IRS to pay in full.
- Execute a Closing Agreement on Final Determination Covering Specific Matters, Form 906
- Agree to cooperate with IRS and Department of Justice offshore enforcement efforts, if requested, by providing information about financial institutions and other facilitators who helped the taxpayer establish or maintain an offshore arrangement.
Streamlined Filing Procedures
The current streamlined procedures are available to both taxpayers residing outside of the U.S. (the Streamlined Foreign Offshore Procedure) and those residing in the U.S. (the Streamlined Domestic Offshore Procedure) for FBAR late filing. For taxpayers that reside outside of the U.S., all penalties are waived. However, for those residing in the U.S., the only penalty will be the Title 26 miscellaneous offshore penalty equal to 5% of the foreign assets that were not disclosed, in addition to tax and interest owed on unreported income.
Under the streamlined procedures, all taxpayers must:
- File original or amended tax returns for the most recent 3 years. Note: While only the most recent three years of returns can be filed within the streamlined procedures, delinquent returns for any prior years must be filed outside of the streamlined procedures. It is important to note that there is no statute of limitations for unfiled tax returns and that while the IRS in general will not request more than the prior six years to be filed, it is not unheard of the IRS requesting more. For any delinquent returns not filed, there will always be a risk that the IRS could pursue filing and penalties related to any unfiled returns 10, 20, 30 years later as the statute of limitations remains open indefinitely until a return has been filed.
- File delinquent FBARs (FinCEN Form 114) for the most recent 6 years
- Under the streamlined filing compliance procedures, either the “Streamlined Foreign Offshore Procedures” (for U.S. Taxpayers Residing in the United States) or the “Streamlined Domestic Offshore Procedures” (for U.S. Taxpayers Residing in the United States), taxpayers must certify that their conduct relating to the failure to file FBARs (FinCen Form 114) and disclosing foreign accounts was not willful on the Certification Of Non-Willful Conduct on Form 14654 or Form 14653. Also known as the FBAR late filing letter.
Delinquent FBAR Submission Procedures
Under the delinquent FBAR submission procedures, the delinquent FBARs (FinCEN Form 114) are filed along with a statement explaining why there is an FBAR late filing. The delinquent procedure can be used if:
- Have an FBAR late filing – have not filed required FBARs
- Are not under a civil examination or criminal investigation by the IRS.
- Have not been contacted by the IRS about FBAR late filing / delinquent FBARs or a request for delinquent tax returns
Under the delinquent FBAR submission procedures the IRS will not impose a penalty for FBAR late filing if you have properly reported and paid tax on all income from the foreign financial accounts being reported on the delinquent FBARs.
While FBAR late filing under this option will not automatically subject the FBAR disclosure to audit or extra scrutiny, it may still be selected for audit through the standard IRS audit selection process.
Delinquent International Information Return Submission Procedures
Taxpayers who do not need to use the OVDP or the Streamlined Filing Compliance Procedures to file delinquent or amended tax returns to report and pay additional tax, but who:
- Have not filed one or more required international information returns,
- Have reasonable cause for not timely filing the information returns,
- Are not under a civil examination or a criminal investigation by the IRS, and
- Have not already been contacted by the IRS about the delinquent information returns
should file the delinquent information returns with a statement of all facts establishing reasonable cause for the failure to file.
Describe Your Situation In The Reasonable Cause Statement
As part of the reasonable cause statement, taxpayers must also certify that any entity for which the information returns are being filed was not engaged in tax evasion. If a reasonable cause statement is not attached to each delinquent information return filed, penalties may be assessed in accordance with existing procedures. Tax Samaritan can assist with the preparation of an appropriate reasonable cause statement to accompany your delinquent information return.
Information returns filed with amended returns will not be automatically subject to audit but may be selected for audit through the existing audit selection processes that are in place for any tax or information returns.
Our goal at Tax Samaritan is to provide the best counsel, advocacy and personal service for our clients. We are not only tax preparation and representation experts, but strive to become valued business partners. Tax Samaritan is committed to understanding our client’s unique needs; every tax situation is different and requires a personal approach in providing realistic and effective solutions.
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Tax Samaritan is a team of Enrolled Agents with over 25 years of experience focusing on US tax preparation and representation. We maintain this tax blog where all articles are written by Enrolled Agents. Our main objective is to educate US taxpayers on their tax responsibilities and the selection of a tax professional. Our articles are also designed to help taxpayers looking to self prepare, providing specific tips and pitfalls to avoid with FBAR late filing.
When looking for a tax professional, choose carefully. We recommend that you hire a credentialed tax professional such as Tax Samaritan that is an Enrolled Agent (America’s Tax Experts). If you are a US taxpayer overseas, we further recommend that you seek a professional who is experienced in expat tax preparation, like Tax Samaritan (most tax professionals have limited to no experience with the unique tax issues of expat taxpayers).
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 FBAR late filing. 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.