What if You Do Not File FBAR?
The FBAR refers to Foreign Bank and Financial Account Reporting which is done by submitting a FinCEN Form 114 to the US government each year to disclose foreign accounts, assets, and investments. While the form has been around for over 50 years, it was not until the recent introduction of FATCA that the Internal Revenue Service began aggressively enforcing fines and penalties against taxpayers who are non-compliant. The FBAR is required of US persons who meet the threshold requirements for filing. It is not uncommon for taxpayers to be unaware of these filing requirements until one or several years of the filing have already passed — and so now the taxpayer is out of compliance and responsible for filing delinquent FBAR for prior years.
What happens if you do not file the FBAR?
The internet is littered with various fear-mongering absurdities that scare you into believing that if you do not file the FBAR, you will be chained and shackled in the IRS basement for the rest of your natural life. In reality, there are probably millions of US persons who are required to file this form and have not done so. Merely because you have not filed the form does not mean you will get in trouble — but not filing it when you know you are supposed to can pose a risk. To get caught, it still requires the Internal Revenue Service to know that you missed filing and that you were even responsible for filing in the first place. So while you should get into compliance to avoid serious fines and penalties, there are plenty of taxpayers who are out of compliance and never hear from the IRS about this issue, so take all the fear-mongering with a grain (or two) of salt.
FBAR Civil Penalty Notice
If the Internal Revenue Service learns that a taxpayer has not properly reported their foreign accounts, they may receive notice of a penalty. The FBAR penalty spectrum is long; non-willful FBAR penalties vary from receiving a warning letter in lieu of penalty all the way up to a $10,000 per account per year (adjusts for inflation) — up to 50% for the entire compliance period. If a person is considered willful, they would generally get penalized 50% maximum value of the unreported accounts up to 100% value for the compliance. In most circumstances, the compliance period is six years.
Disputing the Penalty Notice
Taxpayers have an opportunity to dispute/appeal the penalty notice, but unfortunately, since the FBAR is not a tax form under U.S.C. Title 26, but rather a money and finance form under U.S.C. Title 31, taxpayers do not usually have the opportunity to take the matter to Tax Court. Thus, taxpayers who do not successfully appeal their penalty typically have to go to Federal Court to file suit and litigate the penalties. While the government tries to enforce the Flora Rule — which requires taxpayers to first submit payment for the penalty and then sue for a refund — recently Courts have come down against the government, basically stating you can not eliminate the tax court path to fight FBAR penalties, while still requiring full payment for a non-tax debt.
Resolving the FBAR Before Penalties
For taxpayers who realize they were out of compliance prior to being penalized, they may be able to reduce or even avoid FBAR penalties by submitting to one of the amnesty programs. They are various programs available to assist taxpayers with filing delinquent international information reporting forms such as the FBAR and Form 8938. Taxpayers unsure of how to move forward may consider speaking with a Board-Certified Tax Law Specialist who specializes in these types of offshore disclosure matters in order to get a good lay of the land before filing.
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