Foreign Bank Accounts
If you have a foreign bank account that had a balance of at least $10,000 at any point during the calendar year, federal law requires you disclose the existence of such an account to the Internal Revenue Service. A taxpayer must file a Report of Foreign Bank and Financial Accounts (known as a FBAR) with the U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN). A FBAR must be filed every year if you have a “financial interest in or signature authority over” any foreign account meeting or exceeding the $10,000 threshold.
FBAR and FinCEN are part of the Bank Secrecy Act, a law first passed by Congress in 1970 and expanded by the Patriot Act in 2004, which is designed to assist federal agencies in tracking and stopping money laundering. Unfortunately, many people who have foreign accounts for completely innocent reasons—such as their spouse is a non-U.S. citizen who still has a savings account in his or her native country—inadvertently fail to file a FBAR. The law does not distinguish between innocent spouses and international drug kingpins.
Failure to file a required FBAR can be financially disastrous. Anyone who “willfully” violates the law faces a civil penalty of either $100,000 or 50% of the highest balance of the unreported account, whichever is higher. And this penalty applies for each year a person fails to file a FBAR. So, for example, let’s say you have a foreign bank account with a constant balance of $300,000 and intentionally fail to file FBAR reports for five years. The IRS could subsequently impose a civil penalty of $750,000, more than twice the account’s value.
Better Late Than Never
The IRS will generally not penalize a taxpayer for failing to file a FBAR if the foreign account in question is properly reported on U.S. tax returns and any required taxes are paid on time. This also assumes the IRS has not already initiated an audit (or a criminal investigation) or asked for the delinquent FBARs in question. Also keep in mind, FBAR filings are controlled by FinCEN, not the IRS. Unlike a tax return, there is no additional statutory penalty for filing a FBAR late, only not filing one at all.
Of course, even if there are no penalties, you still must file the delinquent FBARs with FinCEN. You must include a statement explaining why you are filing late. Common reasons given are ignorance of the law—the taxpayer didn’t know he had to file, she didn’t realize her account balance met the $10,000 requirement, he didn’t know the account was considered “foreign,” et al. It is important to be truthful when giving a reason for late filing. The IRS may audit a late filing and any reason you give may be deemed evidence of a “willful” violation of the FBAR law.
In more serious cases, the IRS has an Offshore Voluntary Disclosure Program (OVDP), which encourages U.S. taxpayers to report hidden foreign assets. This program offers delinquent taxpayers a chance to “to get current with their tax returns,” subject to certain civil penalties. The OVDP has led to reporting of billions of dollars in previously undisclosed foreign accounts to the IRS.
You Need Experienced Help
As noted above, in order to avoid potentially crippling civil penalties—and in some cases, possible criminal prosecution—a taxpayer must take steps to address any delinquent FBAR filings before the IRS initiates an audit or other formal investigation. With the proverbial clock ticking, it is imperative a taxpayer who thinks he or she may be in trouble seek the assistance of an experienced California tax attorney. Our tax attorneys in San Diego, Irvine, and Los Angeles can advise you on the best way of addressing your FBAR delinquency and help minimize the risk of an audit or civil penalties. Contact our office today or call (619) 595-1655 if you have any questions or need to speak with someone right away.