Civil and Criminal Consequences of FBAR Penalties Explained

Civil and Criminal Consequences of FBAR Penalties Explained

Civil and Criminal Consequences of FBAR Penalties Explained

When it comes to foreign account FBAR penalties (Foreign Bank and Financial Account Report, FinCEN Form 114), violations can be categorized into two main types: civil FBAR penalties and criminal FBAR penalties. The civil FBAR penalty category can be broken down further into two subcategories (non-willful and willful). While nobody wants to be assessed an FBAR penalty, taxpayers must understand that most penalties are civil, non-willful, and that the IRS has developed various amnesty programs to assist taxpayers in minimizing or even avoiding FBAR penalties altogether. Thus, please be wary of attorneys who want to make you believe that you’ll be heading to jail or prison just because you missed filing some FBARs.  Let’s look at a brief comparison of the different categories of FBAR Penalties.

Non-Willful FBAR Penalties (Civil)

When a taxpayer fails to report their foreign bank and financial accounts, and there was no intent to do so,  then most of the time they will be classified as non-willful. The concept of intent and willfulness is complicated because it involves more than just the intent to avoid having to report foreign accounts — it also includes phrases such as reckless disregard or willful blindness. In general, if taxpayers are simply unaware that they had an FBAR reporting requirement or that their foreign accounts were subject to FBAR (such as taxpayers who may have bank accounts below $10,000 but pension plans above $10,000 that they were unaware were required to report), they will be deemed non-willful.

Willful FBAR Penalties (Civil)

Willful FBAR penalties can be much more serious because there is a 50% maximum value of the account, which means even if the account was only artificially high for a short period of time, these penalties can be extensive. In addition, there is a floor as to how low the penalties could go, which is a minimum of $100,000 — but it adjusts for inflation — so currently it is closer to $150,000+. Thus, in a situation where a taxpayer was willful but only had $50,000 in their foreign account, they could become subject to penalties several times higher than the 50% value on the account. It should be noted that even if a person is civilly willful, it does not mean that they are subject to any criminal implication; criminal willfulness is different than civil willfulness.

Criminal FBAR Penalties (and Online Fear-Mongering)

As with most crimes, a taxpayer must be found guilty beyond a reasonable doubt to become subject to criminal FBAR penalties. Unlike civil penalties, the taxpayer may become subject to both monetary penalties and incarceration if they are convicted of an FBAR crime. Typically, to be convicted of an FBAR crime, the taxpayer will have committed several violations such as tax fraud, tax evasion, money laundering, etc. — so please be wary of ‘Self-Proclaimed Tax Experts‘ and attorneys falsely claiming to be ‘Board-Certified in Tax Law’ who want you to believe that you’re automatically willful and potentially subject to criminal violations simply because you may have failed to file FBARs in prior years.

Late Filing Penalties May be Reduced or Avoided

For Taxpayers who did not timely file their FBAR and/or other international information-related reporting forms, the IRS has developed many different offshore amnesty programs to assist Taxpayers with safely getting into compliance. These programs may reduce or even eliminate international reporting penalties.

Late-Filing Disclosure Options

If a Taxpayer is out of compliance, there are various international offshore tax amnesty programs that they can apply to safely get into compliance. Depending on the specific facts and circumstances of the Taxpayers’ noncompliance, they can determine which program will work best for them.

*Below please find separate links to each program with extensive details about the reporting requirements and examples.

Streamlined Filing Compliance Procedures (SFCP, Non-Willful)

The Streamlined Filing Compliance Procedures is one of the most common programs used by Taxpayers who are non-willful and qualify for either the Streamlined Domestic Offshore Procedures or Streamlined Foreign Offshore Procedures.

Streamlined Domestic Offshore Procedures (SDOP, Non-Willful)

Taxpayers who are considered U.S. residents and file timely tax returns each year but fail to report foreign income and/or assets may consider the Streamlined Domestic Offshore Procedures.

Streamlined Foreign Offshore Procedures (SFOP, Non-Willful)

Taxpayers who are foreign residents may consider the Streamlined Foreign Offshore Procedures, which is typically the preferred program of the two streamlined procedures. That is because under this program, Taxpayers can file original returns, and the 5% title 26 miscellaneous offshore penalty is waived.

Delinquent FBAR Submission Procedures (DFSP, Non-Willful/Reasonable Cause)

Taxpayers who only missed the FBAR reporting and do not have any unreported income or other international information reporting forms to file may consider the Delinquent FBAR Submission Procedures — which may include a penalty waiver.

Delinquent International Information Returns Submission Procedures (DIIRSP, Reasonable Cause)

Taxpayers who have undisclosed foreign accounts and assets beyond just the FBAR — but have no unreported income — may consider the Delinquent International Information Return Submission Procedures. Before November 2020, the IRS was more inclined to issue a penalty waiver, but since then this type of delinquency procedure submission has morphed into a reasonable cause request to waive or abate penalties.

IRS Voluntary Disclosure Procedures (VDP, Willful)

For Taxpayers who are considered willful, the IRS offers a separate program referred to as the IRS Voluntary Disclosure Program (VDP). This program is used by Taxpayers to disclose both unreported domestic and offshore assets and income (before 2018, there was a separate program that only dealt with offshore assets (OVDP), but that program merged back into the traditional voluntary disclosure program (VDP).

Quiet Disclosure

Quiet disclosure is when a Taxpayer submits information to the IRS regarding the undisclosed foreign accounts, assets, and income but they do not go through one of the approved offshore disclosure programs. This is illegal and the IRS has indicated they have every intention of investigating Taxpayers who they discover intentionally sought to file delinquent forms to avoid the penalty instead of submitting to one of the approved methods identified above.

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 who 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. 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. 

Need Help Finding an Experienced Offshore Tax Attorney?

When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for Taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting. 

*This resource may help Taxpayers seeking to hire offshore tax counsel: How to Hire an Offshore Disclosure Lawyer.

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.