Delinquent FBAR and Tax Filing Penalties
Recent media articles surrounding penalty assessments for delinquent FBAR filings have caused confusion over the various IRS programs in place for individuals who need to become compliant with FBARs. The following information is provided as a brief explanation of the programs available.
This information is not a replacement for qualified, professional tax advice for those individuals considering FBAR compliance. ACA recommends that individuals considering becoming FBAR complaint seek the advice of a professional tax adviser prior to moving forward with compliancy.
For more information on locating qualified tax preparers see: http://www.acareturnpreparerdirectory.com
Streamlined filing procedures for U.S. citizens (and Green Card holders) residing outside of the US
These procedures generally apply when: i) the taxpayer failed to report income, ii) tax is owed, and the iii) the failures were “non-willful.” The filing must include a narrative statement of non-willfulness.
No penalties will be applied. However, the returns filed under the streamlined program may still be selected for audit.
Delinquent FBAR Submission Procedures
These procedures generally apply when the taxpayer did not fail to report any income and does not owe any tax, but innocently (non-willfully) failed to file a required FBAR, or innocently (non-willfully) failed to include an account on a previously filed FBAR. These taxpayers can go back and file the delinquent FBARs with a statement indicating why the FBAR is being filed late.
The IRS will not impose a penalty for failure to file the FBARs. If the taxpayer subsequently gets examined and discovers that the taxpayer did in fact fail to report income, penalties can then be applied.
Delinquent International Information Return Submission Procedures (i.e., Form 8938, Form 5471,Form 3520, etc.)
Similar to the delinquent FBAR submission procedures, these procedures generally apply when the taxpayer did not fail to report any income and does not owe any tax, but innocently failed to file any of the required international forms.
The taxpayer can file the delinquent forms, but must include a statement of reasonable cause for the failure to file the form, and certify that any entity for which the information returns are being filed was not engaged in tax evasion. Assuming the IRS accepts the reasonable cause explanation, penalties will not be applied. However, the IRS can still examine the filed forms or the associated tax returns.
Offshore Voluntary Disclosure Program (OVDP)
This program applies when the taxpayer willfully neglected to report income and file FBARs. With this program taxpayers receive a closing agreement, and the returns filed within the program may generally no longer be examined. Entry into the program is expensive and binding. Penalties will be applied, including a 27.5% or 50% offshore penalty based on the highest value of the assets held offshore during the disclosure period (8 years). It is a laborious process, so associated professional fees will be much higher as compared to the other procedures.
This program is generally appropriate for taxpayers who acted willfully because if the IRS catches up to such individuals before they enter the OVDP, the results could be much worse than if they had entered the OVDP. If a taxpayer who acted willfully does not enter the OVDP program and get examined by the IRS, they would potentially be subject to the very severe willful failure penalties, or even criminal prosecution in certain cases.
This was much more widely used by non-willful taxpayers before the availability of the streamlined procedures and delinquent filing procedures. The IRS has said repeatedly that taxpayers filing quiet disclosures will have no penalty protection (both for willful and non-willful behavior) if they get examined.
Recent IRS Announcement on FBAR penalties
The IRS has recently released updated guidance regarding FBAR examinations and FBAR penalties to make the process and potential penalties slightly more taxpayer friendly (the “Guidance”). The Guidance applies to FBARs that are under examination. The Guidance does not impact the procedures described above that are available totaxpayers to get right with the IRS before an examination occurs.
- Examination Procedure: Now, the IRS examiner must “consult with the division’s FBAR coordinator after making a preliminary determination of penalties, and obtain the approval of the group manager.”
- Penalties - Willful Failures: Penalties for willful failures to report still exist for those individuals who fall outside of the aforemented programs or who chose Quiet Disclosure where there is not penalty protection. For years under examination that involve willful failures, the Guidance indicates that “in most cases”, the total penalty for all years under examination will be 50% of the highest aggregate balance of all unreported accounts. The highest possible penalty will be 100% of the highest aggregate balance of all unreported accounts. This is a change as, prior to the Guidance, the IRS could assess penalties for willful failures equal to a multiple of the value of the unreported foreign accounts. The IRS is recognizing that assessing a penalty of over 100% of the value of the account might violate the Eighth Amendment prohibition against excessive fines and penalties.
- Penalties - Non-willful Failures: Penalties for non-willful failures to report still exist for those individuals who fall outside of the aforementioned programs or who chose Quiet Disclosure where there is no penalty protection. For non-willful failures, the total penalty will be limited “in most cases” to $10,000 per year, regardless of the number of unreported accounts for the years under examination. In addition, the total penalty for non-willful failures will be limited to 50% of the highest aggregate balance of all unreported accounts for the years under examination. This is a change as, prior to the Guidance, an individual was potentially subject to penalties of $10,000 per account per year for non-willful failures.
The IRS has released YouTube videos aimed at Americans living abroad to assist them with understanding their filing obligations.
IRS YouTube Videos