What Are FBAR Penalties?
By: James Merlin
Tags: Tax Law, Taxes, Fbar

For those who hold accounts offshore, the IRS rules regarding FBAR (Foreign Bank and Financial Accounts) disclosure are clear. Should the IRS determine that you as the taxpayer purposefully did not disclose your foreign holdings, the FBAR penalties are clear too … and harsh.

If you have foreign account holdings that you need to disclose to the IRS, you may be wondering about the potential FBAR penalties. The maximum penalties could be as high as 50 percent of the account balance, along with the potential for criminal charges.

This is not a situation taxpayers should ignore or take lightly. An attorney well-versed in FBAR requirements can work to protect your interests, hopefully helping you avoid the most serious FBAR related penalties.

What Is FBAR?

Before diving into the potential penalties for violating FBAR rules, let’s explain how FBAR works.

Through FBAR, the IRS requires American taxpayers to disclose any accounts and assets they hold outside the United States when the total value of those holdings is more than $10,000 at any point during the calendar year.

The IRS and federal government began emphasizing enforcement of the FBAR rules over the past several years, meaning those who violate the rules face prosecution at a more frequent rate. Most foreign financial institutions now submit information to the IRS regarding holdings Americans have with them, making it easier for the IRS to track those who are violating FBAR.

Additionally, taxpayers must make an FBAR disclosure every year they meet the criteria, which is something taxpayers often struggle to do. Failure to disclose FBAR in a year means the potential taxpayer is subject to penalties. Failure to disclose FBAR over a series of years could yield multiple penalties stacked on top of each other.

The IRS will apply penalties regarding FBAR differently, depending on the intent of the taxpayer.

Penalties for Failure to Follow FBAR Inadvertently

If the taxpayer accidentally or inadvertently failed to make FBAR disclosures, the penalties will not be as harsh as for a taxpayer who purposefully failed to disclose FBAR.

Some of the ways the IRS may decide that the taxpayer’s failure to disclose was inadvertent include:

· Claiming an inability to understand the rules

· Claiming you did not know your holdings were subject to FBAR

· Simply filing the FBAR information a few days late

· Filing FBAR for some accounts you own, but forgetting about one or two accounts

In a case like this, the most common penalty is a fine of up to $10,000 per occurrence, which encompasses each year the violation occurred.

Understand that even though you believe that you did not intend to violate FBAR, the IRS and the prosecuting attorneys may not see it that way. They may seek to prove that you willfully violated the FBAR rules, which could lead to harsher penalties. Either way, you may want to hire a tax attorney to defend your position.

Penalties for Failure to Follow FBAR Purposefully

If the IRS can show that you willfully violated the FBAR rules, the potential penalties are severe. The prosecutor may attempt to show that you intentionally violated FBAR rules by purposefully refusing to learn about the rules, for example.

A more common means of showing that the taxpayer intentionally violated FBAR involves proving that the taxpayer attempted to cover up failing to file the proper FBAR information, rather than simply admitting the mistake and moving forward.

Should you as a taxpayer be found in intentional violation of the FBAR rules, your penalties may include:

· Fine of either $100,000 or 50 percent of the value of the undisclosed account or asset, whichever is greater

· Tax evasion criminal charges

· Tax fraud criminal charges

Criminal penalties related to willful violation of FBAR rules can include fines up to $250,000 as well as five years of imprisonment.

The fine you could receive will depend in part on the total value of your foreign holdings. When you consider that the IRS can impose fines for each year the taxpayer failed to disclose FBAR on an annual tax return, it is possible that the penalties could exceed the value of the foreign-held account or asset.

Common FBAR Mistakes

Some of the most common mistakes a taxpayer makes with regard to FBAR filing, which could lead to an assessment of penalties, include:

Not including small accounts. If the aggregate of the taxpayer’s foreign account holdings is over $10,000 at any point during the calendar year, then the taxpayer must disclose all foreign holdings, including those accounts of less than $10,000. In other words, a taxpayer cannot have 15 accounts with $1,000 in each one to avoid FBAR. The aggregate of the holdings would be $15,000, which is over the threshold.

Assuming accounts in different countries are separate. If the taxpayer has accounts in multiple countries, he or she should add the value of all of those accounts together to determine FBAR requirements. Even if each of the individual accounts in individual countries has a value of less than $10,000, as long as the aggregate of all of the foreign accounts is more than $10,000, you must follow FBAR disclosure rules.

Failing to understand which holdings match up. If the taxpayer has an annuity or a life insurance policy with a surrender cash value held outside the United States, he or she should disclose the holding through FBAR each year if it exceeds the threshold. Some taxpayers mistakenly assume these types of holdings are exempt from FBAR disclosures.

Assuming you can pay a late fee. With FBAR, there is no such thing as a late penalty. If you file your FBAR information a day late, the IRS can assess the full amount of the fines and criminal charges, if it chooses. Late filings receive the same treatment as not filing at all, although a late filing can show an unintentional violation of the FBAR disclosure regulations.

Not holding records long enough. The IRS can request your tax records related to FBAR for up to six years into the past. Failure to provide these records can leave you unable to prove you did not do anything wrong.

Handling an FBAR Violation

Dealing with FBAR can be extremely confusing for some taxpayers, who already may have a tricky tax situation because of the foreign holdings they have. Whether you meant to make an FBAR related mistake or not, it is important that you seek help from a tax lawyer as soon as possible to attempt to avoid the most severe penalties.

If the IRS is accusing you of willfully violating these rules, an attorney can help you attempt to show that your FBAR violation was unintentional. Even if the IRS assesses an FBAR penalty against you, you do have the right to appeal it. You are better served hiring a tax attorney before it moves to this point, though.