Can IRS Assess Penalties for FBAR if No Unreported Income?

Can IRS Assess Penalties for FBAR if No Unreported Income?

IRS FBAR Penalties if No Unreported Income?

The FBAR (FinCEN Form 114)  is used to report foreign bank and financial accounts across the globe. The accurate reporting of the  FinCEN Form 114  can become very complicated in instances when there was prior year noncompliance. The reason for the complexity of FBAR Filing is that technically, it is not an IRS form. Rather, it is FinCEN Form (Financial Crimes Enforcement Network) that is not covered under Title 26 – and not a tax form — which means the general Title 26 rules do not directly apply. The reason why FBAR has any relation to US tax law is that since 2003, the IRS has been tasked with enforcing compliance with the FBAR. A common question we receive is about whether there are any tax implications associated with the FBAR – and if they impact penalties.  Let’s look at the basics of how FBAR reporting works and how unreported income may impact reporting penalties.

Foreign Accounts Reporting is Separate from Income

The first important fact that taxpayers should be aware of is that any tax implications of foreign accounts do not directly impact the reporting requirements. In other words, if a US person has foreign accounts and the total value of the foreign accounts exceeds the reporting threshold, then all of the accounts have to be reported whether or not those foreign accounts generate any income.

Missed FBAR with No Unreported Income (and No Other Forms Due)

In the best case scenario, the taxpayer may have missed some foreign account reporting but they do not have any other additional information returns to file such as IRS Form 3520 or Form 8938 – and they do not have any missed income that requires modifying the tax return. In this type of situation, the taxpayer may qualify for the Delinquent FBAR Submission Procedures and avoid penalties under the current version of the program, noting the program can change at any time.

Missed FBAR with other Forms Due (DFSP vs DIIRSP)

If a taxpayer missed filing the FBAR and they also missed filing other international information reporting forms as well then they do not qualify for the Delinquent FBAR Submission Procedures. Instead, they qualify for the Delinquent International Information Return Submission Procedures. The key difference is that since November 2020 Delinquent International Information Return Submission procedures do not automatically avoid penalties as they did in the past. Oftentimes taxpayers can still avoid penalties, but the submission is not blessed with the same warm and fuzzy feeling as it was in the prior version of the program where penalties were almost always avoided.

Streamlined vs Reasonable Cause

When a taxpayer is non-willful and/or can show reasonable cause, they have various options available to them to get into compliance. Oftentimes, it will boil down to whether the taxpayer wants to submit under the Streamlined Procedures or whether they want to submit a Reasonable Cause submission and to show that they acted with reasonable cause and not willful neglect. With streamlined, there is a specific streamlined certification form that is used whereas with reasonable cause it is an individualized submission and not in a specific form. Taxpayers should be cautious and who they retain for these types of complex legal matters because they only get one bite at the apple.

Current Year vs Prior Year Non-Compliance

Once a taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, taxpayers should consider speaking with a Board-Certified Tax Law Specialist that specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to streamlined procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead of the Streamlined Procedures. But, if a willful Taxpayer submits an intentionally false narrative under the streamlined procedures (and gets caught), they may become subject to significant fines and penalties

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure

Contact our firm today for assistance.