How Severely Can You Be Punished For Failure to File FBARs?

The 2010 Foreign Account Tax Compliance Act, or FATCA, has caused no shortage of concern for millions of Americans with foreign bank holdings overseas. That Act, which provided the IRS with broad new powers and a mandate to hunt down those secret accounts, has been directly responsible for the disclosure of tens of thousands of previously unknown accounts, and the recovery of billions of dollars in unpaid taxes.

Despite those results, there remain many other people who have yet to disclose their own hidden accounts in foreign banks. If that group includes you, then you may want to consider the possible penalties that can attach to any failure to comply with the IRS’s FBAR filing requirements.

The FBAR (Report of Foreign Bank and Financial Accounts) is something that must be filed by every American with assets held in foreign accounts. That requirement is one that has been a part of the U.S. tax code since 1970, any yet it remains a part of the law that has escaped the notice of most Americans. Indeed, the IRS itself paid little attention to these accounts for almost four decades.

That all changed with the passage of FATCA. Today, the IRS is actively forcing foreign banks to comply with U.S. law, and those banks are gradually disclosing the identities of their U.S. account holders. That can mean only one thing for anyone who has yet to voluntarily come forward or whose identity has not yet been disclosed: eventually, the IRS will find out who you are.

If that doesn’t give you pause, it should. The fact is that not voluntarily complying with these disclosure requirements could earn you some hefty monetary penalties, result in you paying even more in back taxes than you owe, and even lead to criminal prosecution. And what are those penalties, you ask?

Let’s put it this way: as onerous as the penalties for tax violations can be, the punishment for failing to properly meet your FBAR filing requirements are even worse. If you’re fortunate enough to have your failure to file be considered a non-willful failure, you might get lucky and receive nothing more than a $10,000 penalty for each time you were supposed to file and didn’t. If, however, the IRS decides that you intentionally skipped the filing responsibility, they can assess a penalty of $100,000 for each failure or just take half of your account value. Oh, and they are required by law to levy the greater of those two penalty options.

If the agency decides to pursue criminal avenues, you could face fines of a quarter-million dollars and five years in prison. Those penalties are doubled if you are discovered to have violated other tax laws in addition to your failure to file the FBAR. Yes, they’re taking this whole process very seriously indeed.

So, what should you do? Well, given the risk of both fine and imprisonment, and the fact that the Agency will surely be looking to make examples of some of those they deem to be willful tax cheats, your best option probably involves voluntary disclosure. In the end, that may be the best way to mitigate the chances of suffering the worst of those penalties.

How FATCA Has Ended Up Harming Middle Income Americans

Swept up in a tide of populist fury after the near collapse of the financial sector in 2008, many Americans were only too happy to see Congress pass new enforcement legislation to go after wealthy Americans who were hiding assets in overseas accounts. The new law, known as FATCA (the Foreign Account Tax Compliance Act) was passed in 2010, and gave the IRS a broad new mandate to enforce foreign account reporting requirements, as well as the powers needed to accomplish that goal. As it turns out, however, one byproduct of that new zeal for preventing the wealthy from hiding their assets has been unintentional harm inflicted on middle income Americans.

How that happened should serve as a lesson for lawmakers whenever they attempt to craft one-size-fits-all legislative solutions such as FATCA. The goal, after all, was to respond to revelations that banking giants such as the Union Bank of Switzerland were actively working with U.S. account holders to conceal those customers’ assets from the American government. According to reports, the bank assisted seventeen thousand wealthy Americans as those customers sought to hide roughly $20 billion in assets. When FATCA was passed, the intent was to provide the IRS with the powers it needed to force other foreign banking institutions to assist the U.S. in its efforts to discover other large hidden accounts and recover any taxes that might be owed.

By itself, the passage of FATCA seemed a logical solution to an obvious problem. After all, the requirement to file a Report of Foreign Bank and Financial Accounts, more commonly known as the FBAR, has been in place since 1970. The fact that so many foreign account holders either didn’t understand the requirement or simply chose to ignore it was probably something that deserved to be addressed with new legislation.

Moreover, the financial benefits to the country have been significant. Since 2010, more than fifty thousand people have voluntarily come forward and settled their outstanding tax obligations. That has resulted in billions of dollars of recovered tax money that would have otherwise remained secreted away in offshore accounts. Those results are the most obvious examples of the type of positive benefits FACTA has yielded.

At the same time, however, there have been some unforeseen casualties. Thought the law was originally crafted to go after large account holders, it turns out that it has impacted many Americans whose account holdings are far less impressive. In fact, a large number of those who have been impacted most severely are people who can only be considered middle class. They include retirees and others with limited resources.

To make matters worse, one IRS ombudsman has noted that the average small account holder has been forced to pay almost six times the amount of their owed back taxes. Wealthier account holders – the very people this new aggressive strategy was supposedly intended to target – have paid on average only three times what they actually owed.

That disparity in a program that now seems to have a disproportionately less harmful impact on the very group it was designed to punish strikes many people as grossly unfair. It’s little wonder that many are hoping that Congress will correct this inequity when it next addresses this issue.

With FBAR Filings, Ignorance Is Not Bliss

If you’re one of the many Americans who maintains foreign accounts overseas that you’ve never bothered to report to the IRS, you’ve probably heard the bad news. The IRS is coming for you. Oh, the agency may not discover your account today, or even tomorrow, but the odds are that you’ll eventually be found out. Now, here’s the really bad news: when you’re discovered, there are severe penalties that will make you wish you’d simply filed in accordance with the law. And if you’re planning on pleading ignorance of the law, save yourself the trouble.

The fact is that even though the act that led to this new IRS crusade to ferret out foreign accounts – the Foreign Account Tax Compliance Act (FACTA) – is of relatively new origin, the legal requirements it was designed to enforce have been in place since 1970. That’s forty-five years for anyone who’s counting. And yes, that is correct: for four decades, the Internal Revenue Service did little to counter wealthy Americans’ efforts to hide their assets in foreign bank accounts.

That might lead some to think that the IRS failure to focus on this issue for the first forty years of the FBAR (Report of Foreign Bank and Financial Accounts) rules might make the agency more lenient toward any who try to plead ignorance if their accounts are discovered. Those assumptions are based more on wishful thinking than on anything even remotely resembling reality. The fact is that the IRS has indicated that it has no intention of just assuming that account holders had no way of knowing that they were breaking the law.

In fact, the agency has indicated that its default view on that issue will be that anyone who failed to report their account while simultaneously failing to attempt to learn about their responsibility to file an FBAR will be guilty of a willful effort to avoid compliance. The IRS has adopted a position that assumes that they have made the process of learning about filing requirements so accessible to everyone that the only possible reason that someone could not know has to involve a conscious decision to avoid that knowledge.

And, to quote the Bard, “there’s the rub.” As tempting as it may be to simply wait for the IRS to catch you, that choice may end up costing you more than if you voluntarily disclose your accounts now. For while you may have been planning on arguing that your ignorance of the law entitles you to some leniency, you can rest assured that it almost certainly will have the opposite effect. They will simply assume that you intentionally tried to avoid knowledge that was easily obtainable, and will deal with you just as they would anyone else who consciously sought to violate the law.

There’s simply no escaping the fact that the IRS is deathly serious about its mandate to root out all foreign accounts and collect back taxes owed by those American account holders. Your best option is to recognize that simple truth now, and make your plans accordingly. Just know that if you wait for them to discover your account before you voluntarily disclose it, ignorance of the law will definitely not protect you from any punitive measures they decide to enforce.

The Dangers of Quiet Disclosure for First Time FBAR Filers

Perhaps you’ve heard stories of how many taxpayers who had previously never disclosed their offshore accounts to the IRS have been quietly disclosing their accounts’ existence in an attempt to avoid some penalties that the IRS might assess for their previous failure to file FBARS. This practice typically involves simply filing a Report of Foreign Bank and Financial Accounts and then staying in compliance from that point forward. Usually, this involves amending previous tax returns as well. For a variety of reasons the quiet disclosure strategy may not be viable for much longer.

The fact is that this strategy actually does nothing to comply with the law, since it is an intentional attempt to circumvent the penalties that apply under the Offshore Voluntary Disclosure program. That program is the doorway through which the IRS wants everyone with one of these secret accounts to step on their way to legal compliance. When the GAO audited the FBAR filings a few years ago, they discovered that there had been a sharp uptick in the number of first-time filers – which led them to conclude that the IRS was doing a poor job of catching people who were evading the preferred system.

Here’s the thing though: you can face criminal prosecution if the agency determines that you intentionally avoided the FBAR filing requirements. Criminal penalties can include sizeable fines, as well as prison time. The only way you can be sure to avoid those criminal penalties is by participating in the Offshore Voluntary Disclosure program. The other options, including quiet disclosure or just hoping that you never get caught, provide no such protections.

While thousands of taxpayers are believed to have simply mailed in their missing forms along with amended tax returns for previous years, that choice can invite trouble. In the wake of the GAO’s discovery that there were far more quiet disclosures than the IRS had previously believed, the Internal Revenue Service was advised to begin more aggressive action to stop those backdoor attempts at compliance. The Agency accepted those recommendations, which means that quiet disclosure may actually now bring exactly the type of negative attention those filers seek to avoid.

As for how they would do that, the answer is simple. If they see that the foreign account box is checked on your Schedule B, as required by law, but was not checked in the previous year, that raises a red flag. The obvious question they would ask at that point is when you actually opened the account. And if they can determine that the account was not opened within the last tax year, you can probably expect an audit or other investigative action.

That leads to one more question: what should you do? Well, the option you choose should be based on your individual circumstances. There are obviously cases where you have no real tax burden on a smaller account, and that may make it worth your while to pursue a quiet disclosure strategy. If, on the other hand, there is even the slightest chance that you might be liable for larger penalties or even criminal prosecution, the only safe path is to seek the amnesty that the IRS voluntary disclosure offers.

Six Reasons Why You Should Be Reporting Your Foreign Bank Accounts

Once upon a time, Americans used to be able to shelter money in foreign bank accounts without much concern that the IRS would ever find out about it. Many of those countries even had laws that ensured account holder privacy. That all changed over the last decade, as the US government began aggressively targeting those accounts and pressuring foreign governments and banks to provide account information for tax purposes. If you have bank accounts in foreign countries and have yet to file a Report of Foreign Bank and Financial Account (FBAR), here are six reasons why you should do so as soon as possible.

The IRS is Serious about This Issue

With the passage of the Foreign Account Tax Compliance Act (FATCA), the IRS found itself with a new and stronger arsenal of weapons to use in the enforcement of tax laws. That Act allows the IRS to subject foreign banks that fail to report U.S. citizen account activity to harsh penalty taxes. The agency has used this tool aggressively and has brought most of the major foreign banks into compliance.

New Fines Are Extremely Punitive

That same Act gives the IRS wide latitude to assess penalty fines against individuals who fail to meet their legal reporting requirements. These fines are not minor either. In fact, the law allows penalties of $100,000 or half of the account balance. The worst part for you is that that penalty actually ends up being the greater of those two options!

Penalty Enforcement Requirements Favor the IRS

It used to be that arguing with the IRS involved complex legal questions about the source of your income, or what portion of it is actually taxable. FATCA has changed all that too. In fact, the penalties can be assessed with ease. All the IRS has to do is demonstrate that you have the foreign account and that you failed to file the proper FBAR.

Compliance is Simple

Right now, compliance is simple. All you have to do is file your FBAR before the 15th of April in any given year (starting April, 2016). Note that this is a requirement for anyone who has an account worth more than $10,000. You just go to the reporting website and provide the necessary information. There are also a number of independent providers who can aid you with the process. Keep in mind that there are no taxes due at the time of filing, so there is no reason to put it off.

You Cannot Keep it Secret Forever

To put it as bluntly as possible: the IRS is eventually going to catch you. Better to deal with the issue now than face what could be even stronger penalties in the future.

Current IRS Disclosure Options May Expire

Right now, there are special options that can make this process easier for those who voluntarily disclose their accounts. You can even avoid those severe penalties by coming forward before you are discovered. However, these types of special options are not going to last forever, so it just makes sense to take advantage of them while you can!

New FBAR Requirements A Rousing Success!

If you’ve been wondering how much success the Internal Revenue Service has been having with its current FBAR enforcement efforts, the news is positive. Since the new targeting effort began six years ago, more than fifty thousand U.S. taxpayers have voluntarily disclosed previously hidden offshore foreign accounts by filing the required Report of Foreign Bank and Financial Account. These taxpayers have been taking advantage of the Offshore Voluntary Disclosure Program put in place as an incentive to those who want to avoid the heavy punitive fines that will be leveled against those the IRS catches on its own.

Keep in mind that the fifty thousand people mentioned above does not include those taxpayers the IRS is still managing to detect. It only includes those who have taken the initiative to come forward before detection. When the IRS discovers an undisclosed account, those fines and other penalties are not waived. And if you’re someone who still thinks that these fines will amount to little more than a slap on the wrist, think again.

When you have an undisclosed foreign account detected by the Internal Revenue Service, you can forget about leniency. Under the current guidelines, all the agency has to do is prove that you failed to disclose the account. Intent doesn’t matter. The source of your income doesn’t matter. The only relevant factor is one that is all too easy to demonstrate: that you never filed the required FBAR. As soon as they prove that, their ability to assess fines kicks in automatically.

These are not small penalties either. The minimum penalty consists of a $100,000 fine. Of course, if you have millions of dollars in your offshore accounts, you may think $100,000 a small price to pay to avoid U.S. taxes. Remember, though, that is the minimum amount. If your account is worth $200,000 or more, then the IRS can seize half of that account! That’s where the real pain comes into play. Penalties are based on the greater of $100,000 or half of each account balance.

The threat of those penalties has been more than sufficient to entice tens of thousands of offshore account holders to come forward, come clean, and pay any lawful taxes they owe. That means that if you are one of those who have yet to come forward, the opportunity to remain hidden is lessening by the day. The fact is that the IRS appears to only be getting started with its detection efforts, and audits of foreign banks and their accounts continue to reveal new undisclosed holdings.

At this point, there is no real choice for anyone who wants to avoid heavy civil penalties and possible criminal prosecution. The IRS has not yet abandoned the “carrot” approach to uncovering these hidden accounts, but it would be foolish to think that amnesty for voluntary disclosure will last forever. Eventually, the IRS will simply cease its forbearance, set aside the “carrot,” and start relying solely on the “stick” approach. And that’s a stick that anyone with sizeable foreign account assets should definitely strive to avoid.

How Do You Know If You Have a Foreign Account Subject to FBAR Requirements?

Because of the increased attention the IRS is giving to holders of overseas bank accounts, many Americans with assets overseas are understandably concerned – and with good reason! The penalties for failing to disclose these accounts can range from $10,000 to as much as one-half of the total account value. Obviously, it just makes sense for these citizens to want to know more about which types of accounts the IRS is seeking, and whether their holdings qualify for greater scrutiny.

Most people who are dealing with FBAR (Report of Foreign Bank and Financial Accounts) issues tend to assume that they have something to be worried about if they have any foreign accounts at all. That may not be the case, however. In fact, the ITS has some very specific regulations on file that go into some detail about which types of overseas assets are subject to those reporting requirements, and which are not.

For example, if you have an account in a large U.S. bank, that is obviously not a foreign account subject to these filing requirements. That means that you can purchase foreign securities through a United States securities broker and not have that portfolio considered a foreign account. That is due to the account itself being held by a financial institution located in the U.S.

By the same token, if you have an account with an American financial institution that chooses to pool your money with other sums outside of the United States, it is likewise not reportable. These omnibus accounts are considered to be outside of your direct control, and thus do not rise to the level of account ownership that the FBAR rules were designed to address.

In those and similar examples, the basic underlying issue comes down to two things: whether the account is located in an institution outside of the United States, and whether the individual in question has the ability to exercise direct control over those account assets.

In the first instance, you could exercise control, but the account is held within an American institution inside the United States. In the second example, your assets might be held in a collective foreign account, but you would only have access to your funds, and then only through your own financial institution. A third example would be cases where you act with signatory authority for an employer’s overseas accounts. Since the account is not yours, you would have no duty to report it.

In the end, these definitions come down to issues of jurisdiction and custodial arrangement. That is why your accounts in foreign banking institutions do fall within the mandates of the FBAR rules. Those accounts are located at foreign institutions, and provide you with direct custodial control over the management of account assets.

As simple and obvious as those examples might seem to be, there can still be room for confusion. That makes it all the more imperative that you consult with a competent professional if you have any questions about whether your accounts need to be reported under FBAR requirements. Getting sound advice now can help you avoid unpleasant conversations with the IRS later.

Don’t Count on Delays to Escape Your FBAR Filing Obligations

By now, most people who have bank accounts overseas should be aware of the Internal Revenue Service’s more aggressive approach to uncovering hidden assets and taxing and penalizing the Americans who own them. In the last five years alone, billions of dollars in unpaid taxes and penalties have been collected by the taxing agency, as tens of thousands of account holders have come forward to accept amnesty from harsher penalties and possible criminal prosecution.

If you’re one of the many who are still holding out hope that you can go undetected, or who think that they can somehow escape consequences if they can just remain hidden until the statute of limitations runs out, that’s a risk that almost certainly won’t pay off. Oh sure, there is a slim chance that you might somehow manage to never be discovered by the IRS, and at the same time never have your foreign financial institution report your account on its own initiative – but it’s an extremely slim chance.

As for simply waiting out the IRS and somehow getting past a statute of limitations, forget about it. The fact is that you’re not going to be able to enjoy that sort of technicality-based luxury. Now before you rise up and point out how even the IRS is subject to certain time-based limitations on its actions, just consider the facts. And believe us when we tell you, these facts are not going to be in your favor in any dispute over undisclosed accounts when you’re trying to rely on a statute of limitations argument.

You already know that you are required to file a Report of Foreign Bank and Financial Accounts, or FBAR, for any financial accounts that you hold in financial institutions outside of the United States if they are valued at$10,000 or more. Now, if you’ve never filed the proper report, you might think that the standard statute of limitations would apply, right? That would mean that the IRS would have three or six years to initiate action. Sadly, those limitations do not even come close to applying in these cases.

The reason for that is quite simple. Those statute of limitations issues only arise for returns that have been filed. When you fail to file your required FBAR, the time clock on those limitations never begins to run. That means that there is no effective time bar on any IRS action until they actually discover the existence of your hidden account. At that point, they then have their three or six years to initiate action against you.

So, if you cannot simply hide from the IRS and wait for non-existent time limits to be reached, what can you do? If you want to avoid some of the most severe penalties found anywhere in the tax code, and the possibility of being criminally prosecuted, there’s only one option: voluntarily disclose your account now and come to a settlement with the agency. The fact is that the longer you wait, the more punitive their reaction is likely to be if they catch you before you come forward.

Choosing the Best Offshore Account Disclosure Strategy

If you’ve spent the last five years wondering what to do with that secret offshore bank account you’ve been hiding from the IRS all these years, then there are many things to consider. You’ve probably already examined your situation in some detail and realize just how precarious your situation actually is. At this point, you may have also realized that the IRS dragnet for these foreign accounts is eventually going to catch up to you. Still, even if you’ve already come to the realization that you are going to have to disclose your holdings eventually, you may not be sure of which option would best serve your interests.

When it comes to coming into compliance with the requirement to file a Report of Foreign Bank and Financial Accounts (FBAR), you have several options available to you. Which one you choose can determine just how severe your penalties may be for failing to disclose earlier, and could also decide whether or not you face any criminal charges. Here are your options:

  • You can opt to attempt a quiet disclosure and hopefully slip between the cracks in the IRS enforcement system. This option requires only that you file the missing FBAR, and amend your prior tax returns to reflect the taxes you actually owed. You also need to include any payment due, of course.

The risk is that your quiet disclosure will be discovered, since the IRS is now actively searching for such attempts to evade normal disclosure expectations. Obviously, the agency wants to retain the option to penalize you for your failure to disclose, and the quiet disclosure method seeks to deny them that opportunity.

  • You can pursue the agency’s Streamlined Program, but you may have to prove that you’re a non-willful tax evader. In other words, you must demonstrate that your failure to disclose was not due to some real attempt to avoid taxes. This option can limit the penalties that you may face. Its major drawback, however, is that it provides no protection from prosecution if the IRS determines that you did in fact willfully evade disclosure in the past.
  • The third option is the Offshore Voluntary Disclosure program. This option has the most severe penalties, but also provides amnesty from prosecution and the assurance that the process will bring you into full compliance with all relevant laws. It requires full and transparent disclosure with the IRS, the filing of FBARs for the prior eight years, and amended tax returns. You also have to pay all taxes due, as well as penalties as determined by the agency.

The best option is, of course, to consult a competent tax attorney and develop a clear strategy for resolving your disclosure problems. The IRS is looking for you, and there’s every reason to believe that they will eventually discover your account. A good attorney can assist you in reviewing your options and determining a path forward that will best suit your unique circumstances and legal needs.

Are FATCA FBAR Requirements Making Life Difficult for Expats?

When Congress passed the Foreign Account Tax Compliance Act back in 2010, it had very good reasons for doing so. After all, U.S. authorities had just learned that there were foreign banks that were not only running a blind eye to U.S. tax evasion, but that were actively assisting those taxpayers in their effort to avoid their tax responsibilities. FATCA was passed to change that dynamic by aggressively imposing severe sanctions against firms that refused to cooperate in the disclosure of their account holders, and against individuals who failed to properly disclose those assets.

Fast forward to 2015 and we see the fruits of those enforcement efforts. From the Internal Revenue Service’s perspective, the effort has yielded tremendously positive results. According to the IRS, some fifty thousand individual taxpayers have taken part in the agency’s voluntary disclosure program – one that provides immunity from harsh penalties for those who come forward on their own. In addition, more than 160,000 overseas companies have agreed to assist the U.S. in this compliance effort. On the surface, the FATCA process would seem to be a huge success.

But what about those American taxpayers living overseas –and especially those who have tried to remain in compliance with U.S. laws throughout their time as expatriates? There are always unforeseen consequences whenever new laws are passed, so one would expect to see at least some sort of unexpected impact as a result of FATCA too. Sadly, that is the case.

First of all, it is important to note that there are millions of American citizens living abroad. These U.S. taxpayers are, by and large, middle income Americans who choose to live in foreign countries for reasons that typically involve business assignments. Sure, there are some wealthy Americans living overseas as well, but the bulk of those expats are what most Americans would consider to be middle class.

Here’s the problem in a nutshell: for Americans who live in the countries where their accounts are held, these FATCA FBAR reporting rules are proving to be more trouble than they’re worth. Some Expats have been complaining that these new rules have led countries such as China to close U.S. citizens’ foreign currency accounts, or to restrict banking services to only those with extremely large monthly balances – sometimes in excess of $10m. In short, the new attention placed on these accounts is causing even those with small accounts overseas considerable inconvenience.

In response, the number of expats who have simply renounced their United States citizenship has hit record numbers in each of the last two years. For many, it is a simple matter of what they perceive to be a basic lack of fairness. Since they pay the taxes they are required to pay in the countries in which they live, they find the additional U.S. taxes to be too much to bear.

Congress is reportedly looking into the issue, and a number of lawmakers have expressed interest in revising the rules for Americans who actually live in those countries where they bank. Whether the Legislature will actually move to correct some of these unforeseen FATCA side effects remains to be seen, but one thing is certain. Without correction, the number of American expatriates who simply abandon their citizenship will probably continue to rise.