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.