How to Avoid FBAR Penalties for Late Filing
How to Avoid FBAR Penalties for Late Form Filing: In recent years, the Internal Revenue Service has significantly increased enforcement of FBAR Filing and Foreign Account Disclosures and FBAR Reporting. As a result of the increased FBAR enforcement, the IRS has also begun routinely issuing penalties for noncompliance with Foreign Bank and Financial Account Reporting. While it is not always possible to avoid FBAR Penalties, depending on the facts and circumstances of the Taxpayer’s situation — even if a taxpayer files a late FBAR or makes an untimely Foreign Account Disclosure — they may be able to minimize and avoid penalties at some stage of the matter. Our FBAR lawyers will summarize a few ways in which a noncompliance FBAR Filer may be able to minimize or avoid FBAR penalties.
FBAR Delinquency Procedure
While the FBAR is required to be filed at the same time a tax return is filed (although it is currently on automatic extension), the FBAR is filed separately with FinCEN. As a result, it is not uncommon for a Taxpayer to have no issues with their tax returns — and have their foreign account noncompliance limited to just the late FBAR. In this type of situation, in which a taxpayer only has FBAR issues, they may be able to avoid FBAR penalties altogether:
As provided by the IRS:
“The IRS will not impose a penalty for the failure to file the delinquent FBARs if you properly reported on your U.S. tax returns, and paid all tax on, the income from the foreign financial accounts reported on the delinquent FBARs, and you have not previously been contacted regarding an income tax examination or a request for delinquent returns for the years for which the delinquent FBARs are submitted.
FBARs will not be automatically subject to audit but may be selected for audit through the existing audit selection processes that are in place for any tax or information returns.”
Reasonable Cause & Non-Willful FBAR Penalties
When a Taxpayer is able to show that their noncompliance with FBAR filing is justified based on reasonable cause — they can normally avoid (or at least minimize) the severity of assessed or potential FBAR penalties. In order to show reasonable cause, the taxpayer must be non-willful since reasonable cause is not an exception to willfulness — noting, that when it comes to FBAR penalties, willfulness includes reckless disregard and willful blindness.
A penalty will not be asserted for an account if it is determined that the failure to report the account on a timely filed FBAR was not willful, the failure to report the account on a timely-filed FBAR was due to reasonable cause, and the account was properly reported on the delinquent FBAR.
In other words, if a taxpayer files an accurate late FBAR and can show they are non-willful, then FBAR penalty should be avoided — if not minimized.
Streamlined Foreign Offshore Procedures
Under the Streamlined Foreign Offshore Procedures, a Taxpayer may be able to avoid any penalties for FBAR — or any other international information reporting form. It is important to note that there are certain very specific requirements the taxpayer must meet — which includes qualifying as a foreign resident (under the specific requirements of the program) and being non-willful. For taxpayers who qualify, the Streamlined Foreign Offshore Procedures are great program.
You May Be Able to Avoid or Minimize FBAR Penalties
In order to determine whether or not a Taxpayer may qualify to avoid or minimize FBAR penalties, the IRS utilizes a ‘Totality of the Circumstance‘ test. Based on their specific facts, some Taxpayers may qualify for partial or complete penalty abatement — or pre-penalty avoidance – but should be careful before making any proactive representation to the IRS. Late or incomplete FBAR filers should consider speaking with a Board-Certified Tax Law Specialist before proceeding with their statement to the Internal Revenue Service.
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