FBAR Penalties

FBAR Penalty Overview

When reporting foreign accounts, assets, and investments to the IRS, the most common international information reporting form that most taxpayers may have to file is the FBAR (aka FinCEN Form 114).  Unlike other international reporting forms taxpayers have to file, this form is not an IRS form but a FinCEN form. The reason this is so important is because while the FBAR is used to report foreign accounts — it does not have any impact on a taxpayer’s income tax filing. In other words, the FBAR form is filed separately from a tax return and it is filed even if the taxpayer does not have to file a tax return. For most taxpayers, the biggest concern involving the FBAR is whether they will be penalized for failing to file.  In general, the IRS does penalize taxpayers for failing to file the form, but fines are typically nowhere near as bad as some tax lawyers and practitioners want to make taxpayers believe – and oftentimes penalties can be avoided, minimized, or abated through one of the offshore disclosure programs. Let’s look at some important concepts involving FBAR penalties by working through some common examples:

*For all examples, please note that the Taxpayers are U.S. persons for tax purposes who have not made any treaty elections to be treated as a Non-Resident Alien (NRA). Also, these examples are for illustrative purposes only and Taxpayers should consult with a Board-Certified Tax Law Specialist if they have specific questions about their reporting requirements and not rely on this article for legal advice.

First, Non-Willful vs Willful Penalties

FBAR penalties can be broken down into two main categories: civil FBAR penalties and criminal FBAR penalties. The civil penalty category can then be broken down further into non-willfulness and willfulness. Noting, that most of the time taxpayers who are subject to FBAR penalties will be subject to non-willful civil penalties and not willful penalties, the latter which can be significantly worse.

Criminal FBAR Penalties are Rare

While taxpayers may also be subject to criminal FBAR penalties it is not very common and more often than not it only occurs in situations in which the taxpayer has committed multiple other crimes such as tax fraud, evasion, money laundering, structuring, etc.

Failure to File (Non-Willful)

The most common type of FBAR penalties are civil non-willful penalties from the failure to file the FBAR form (or filing the FBAR form late):

• • • Example: Adam is a U.S. citizen who previously worked overseas and has multiple foreign accounts. He does not access the accounts and was unaware that he was required to disclose these accounts on his US tax return. Adam may be subject to non-willful FBAR penalties.

    • Example: Adrian is a lawful permanent resident who grew up in Canada as a Canadian citizen. Previous to working in the United States, Adrian worked for a company in Canada and accumulated a significant amount of RRSP at TFSA. Since becoming a lawful permanent resident, Adrian has not accessed the accounts, made any contributions, or received any distributions. He was completely unaware that there was any reporting requirement. Adrian may be subject to non-willfulness FBAR penalties.

Missed an Account (Non-Willful)

Typically, just missing a foreign account or two on an FBAR will not lead to penalties, but this depends on the value of the account, how many accounts were missed, how many years the accounts were not reported, and why they were not reported:

• • • Example: Brian is a U.S. person who has been filing his FBAR each year. Recently, he realized after the past few years he missed a small dormant account in India which has less than $100 USD. Chances are Brian would not be penalized if he amends the FBAR.

    • Example: Brad is a U.S. person who has been filing the FBAR each year. Recently, he learned for the first time that his foreign pension accounts were reportable as well — and they have a significant amount of value. The value of the foreign pension accounts overshadows the value of the bank accounts that he has been reporting. The issue will then become whether the IRS determines that the original FBAR were substantially compliant with the reporting requirements. Brad will want to consider the different offshore disclosure options for the pension accounts.

Late-Filing (Non-Willful) vs Quiet Disclosure

When a taxpayer fails to file the FBAR timely, there are various options they can consider to get into compliance to minimize foreign account penalties. For non-willful taxpayers, there are several amnesty options available — but if the taxpayer is willful, then the only option is typically the IRS Voluntary Disclosure Program (VDP). Taxpayers should also be cautious to avoid filing required disclosure:

• • • Example: Charlie is a U.S. person who was unaware of the FBAR filing requirement and now wants to file late FBAR. Charlie also has some unreported income, and the value of the accounts exceeds the Form 8938 filing requirements. Charlie should consider the different amnesty options to determine if he may be able to either avoid the penalty or minimize the penalty.

    • Example: Chris is a U.S. person who also recently learned that he should have been filing FBAR and Form 8938 each year. Chris is concerned about the size of the penalty he might get assessed, so instead of submitting to one of the offshore disclosure programs, he quietly discloses his foreign accounts on the FBAR and his amended returns. If Chris is found by the IRS, he may have turned a non-willful situation into a willful violation — and this may lead to extensive fines and penalties.

Failure to File (Civil Willful)

Taxpayers who know that they are required to file the FBAR each year but do not do so may be subject to willfulness penalties. Noting, willfulness does not require intent and includes reckless disregard and willful blindness:

• • • Example: David is a U.S. citizen who has several foreign accounts that he uses for investments abroad. David knows he is supposed to file the FBAR each year to report the foreign account but he does not want to inform the U.S. government about his foreign accounts and assets, so he intentionally does not report his foreign accounts on the FBAR and other international information reporting forms as well. David may be subject to willfulness FBAR penalties.

    • Example: Danielle is a U.S. citizen who has multiple foreign accounts overseas. One of the accounts is a very large account and she does not want to report this account to the IRS. She believes that the foreign financial institution (FFI) will not disclose her information to the U.S. government. Therefore, Danielle intentionally excludes the high value account from the FBAR. Danielle may be subject to willfulness penalties.

Failure to File (Criminal)

Criminal FBAR penalties are much less common than civil FBAR penalties and usually only occur in conjunction with other criminal violations:

• • • Example: Frank is a U.S. person who has been committing tax fraud by failing to report his U.S. income — and then transferring this money into foreign accounts. He knows he is supposed to report the income and he knows he is required to report the foreign accounts but he intentionally does not do so. He also intentionally fails to file tax returns because he believes the IRS will not find him. This may lead to a criminal investigation and criminal FBAR penalties.

    • Example: Fred is a U.S. citizen who has been laundering money in the United States through a tax evasion scheme. Fred intentionally falsifies his U.S. tax returns and transfers the laundered money overseas into foreign accounts under the names of people who live overseas and are not considered U.S. persons for tax or reporting purposes. This may lead to a criminal investigation. This may lead to a criminal investigation and criminal FBAR 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.

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.

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

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