US citizens or residents who have financial assets in accounts overseas, pay close attention to whether the combined value of those accounts ever exceeds $10,000 in value at any point during the year. If that occurs, a Foreign Bank Account Report (“FBAR”) would be required for that year and failing to file can result in extremely steep civil and criminal penalties.
An FBAR is required from every US individual or entity that has a financial interest or signature authority over foreign financial accounts that exceed $10,000 at any time during the year. This means that even if the value of a foreign financial account was $0 every day of the year except for one day where the value of the account was $10,001, the US owner of that account will need to file an FBAR.
The FBAR is due on April 15 with an automatic extension to October 15, regardless of whether or not you file a US tax return that year. Generally, records of these foreign financial accounts should be kept for five years following the due date of the FBAR.
Steep penalties can be imposed for not filing an FBAR and failing to maintain records of foreign financial accounts. The penalties imposed can be civil, criminal, or both. Criminal penalties can go as high as $500,000, 10 years in prison, or both. Civil penalties for willful violation can be the greater of $100,000 ($129,210 as adjusted for inflation) or 50% of the value of the foreign account(s) in the year that an FBAR and foreign records were required but not filed or maintained. These penalties are assessed for each year an FBAR was not filed. This means that penalties can potentially reach, but not exceed, 100% of the value of the foreign account.
Offshore Voluntary Disclosure Program
In exchange for limited exposure to penalties and criminal liabilities, the IRS started the Offshore Voluntary Disclosure Program (“OVDP”) in order to entice more taxpayers to come forward and disclose their foreign financial assets. The OVDP involves three phases:
- Phase One: Send a letter to the IRS applying to the OVDP.
- Phase Two: Submit an initial disclosure of information related to the foreign accounts.
- Phase Three: Submit a full disclosure of all foreign accounts. Part of this process involves filing amended returns, FBARs, and other related foreign disclosure forms for the previous 8 years. This is also the phase where taxpayers can present arguments for the mitigation of penalties.
As part of OVDP, taxpayers pay taxes, interest, and a reduced 20% penalty on any amount due along with a penalty of 27.5% of the taxpayer’s highest offshore account balance. Taxpayers also receive protection from criminal prosecution.
For those who certify under penalty of perjury that their failure to disclose foreign accounts was not willful, the IRS offers a streamlined version of OVDP with a reduced 5% penalty on the highest balance of the accounts over the previous 6 years for domestic taxpayers and a 0% penalty for taxpayers living abroad. The streamlined version requires taxpayers to file 3 years of amended tax returns and 6 years of FBARs. However, this leniency comes at a potential cost: if the IRS discovers that a taxpayer’s nondisclosure actually was willful, taking part in the streamlined OVDP provides them no protection from further prosecution.
The Offshore Voluntary Disclosure Program ends on September 28, 2018. After this date, the options for taxpayers who have not filed a timely FBAR will include the streamlined version of OVDP and quiet disclosure by filing delinquent FBARs.
Since the consequences of violating FBAR filing and recordkeeping requirements are extremely costly, it is important to be aware of the need to track the value of foreign accounts and file FBARs as necessary. If you think that you might need to file an FBAR or take part in the OVDP, please do not hesitate to contact your L&B professional at (858) 558-9200.