Here’s one of the most frequent questions people ask me about Foreign Bank Account Reports (FBARs).
‘‘I recently learned about the need to file an FBAR for overseas accounts with over $10,000. I am eligible but I haven’t filed because I was unaware of this requirement. Can ignorance be a valid reason for not filing FBARs?’’
The question is important because foreign bank account reporting remains a crucial aspect of tax compliance for U.S. taxpayers with offshore financial investments, assets, and accounts. Failure to file FBARs can result in severe penalties, ranging from monetary fines to criminal charges in extreme cases.
Some people mistakenly believe that ignorance qualifies as a valid excuse for not complying. Other taxpayers, even after realizing that the law affects them, choose to skip reporting their foreign accounts, thinking the IRS won’t find out about their assets. However, this dangerous misconception can lead to serious consequences and cripple you financially.
Tougher Enforcement by the IRS
In recent years, the U.S. government has shown it’s serious about enforcing reporting compliance. The Foreign Account Tax Compliance Act, also known as FATCA, strengthens the government’s efforts to combat tax evasion among U.S. residents who hold financial assets overseas.
Under FATCA, the agency requires foreign financial institutions to report a U.S. taxpayer’s financial information- including name, address, account numbers, and finances to the U.S. Treasury Department. This means that even if taxpayers don’t disclose their investments, assets, or accounts overseas, the IRS has its ways of uncovering them.
If you’re an expat or a U.S. resident holding an offshore account with an aggregate value of over $10,000 at any time in a calendar year but haven’t filed yet because you’re simply just unaware of the requirements, here are five things you need to know.
1. Ignorance won’t save you.
Individuals whose offshore account exceeds $10,000 must report to the IRS. Whether the failure to file is intentional or due to a lack of awareness, ignorance of the law is not a valid defense for non-compliance. Regardless of the reason, not filing an FBAR when you’re required to do so will not exempt you from incurring penalties.
2. Penalties for non-compliance can be severe.
Failing to report foreign financial accounts can lead to significant penalties. The severity of these penalties depends on whether the failure is categorized as non-willful or willful.
In cases of non-willful violations, the maximum penalty can reach up to $10,000. However, if the IRS determines the violation is willful, you can face a maximum penalty of $10,000 or half of the account’s value.
Willful violation may also result in criminal penalties which may include up to 10 years in prison or a maximum fine of $500,000.
3. Trying to prove ignorance is complex, but you can try.
If you failed to report FBAR because you were unaware of the law or didn’t understand it, and you never intended to evade taxes, the IRS might give you a break. However, this complex process requires you to submit your facts and prove you had a good reason for not filing.
Non-willful violations typically incur lower penalties and are less likely to result in criminal charges.
4. The IRS has six years to enforce penalties for not filing your FBAR.
If you’re behind, file the documents you missed within the last six years. Any documents you didn’t file more than six years ago are no longer relevant.
5. The IRS offers amnesty programs.
Taxpayers who need to get caught up can find help in two popular amnesty programs.
The IRS Streamlined Filing Procedure gives taxpayers the chance to comply with IRS laws by filing tax returns for the past three years and submitting any overdue FBARs for the prior six years.
The Voluntary Disclosure Program is an option for taxpayers who have willfully failed to report undisclosed offshore financial assets and are seeking protection from criminal prosecution for noncompliance.
If you have foreign financial accounts, assets, and investments, and haven’t been filing FBARs, it’s vital to take immediate action. Remember, the longer you wait, the more severe and costly the penalties may become.
While you can resolve the issue on your own, you’ll save yourself time and trouble by hiring a tax professional who can give you the best advice, do it for you, and help you follow the law so you’ll sleep better at night.
If you need help with your FBAR compliance or other tax-related challenges, call Tax Samaritan at 775-305-1040 or email us at help@TaxSamaritan.com for a free 15-minute, no-obligation consultation with our tax expert.