Reporting your Foreign Financial Accounts is serious business – it is not to be taken lightly.
The Bank Secrecy Act’s requirement that U.S. owners of certain foreign financial accounts file annual reports (called “FBARs”) continues to be a hotbed of controversy and receives strict enforcement by the IRS and Department of Justice. Consider the bad news first:
For willful failures, penalties can reach 100% of the highest balance held in the pertinent foreign accounts; taxpayer’s simple failure to check a “I have a foreign account” box on a 1040 satisfies the definition of a “willful” failure (much higher penalties); Fifth Amendment cannot be asserted as a defense to not filing an FBAR; the FBAR penalties may be imposed on an account-by-account basis, rather than per FBAR basis; separate requirement to file Form 8938, Statement of Specified Foreign Financial Assets, for a broader scope of foreign assets is easy to miss but just as serious. Comparison of FBAR v. Form 8938.
The Penalty regimes are harsh. If non-willful, up to $10,000 for each undisclosed account; if willful, up to $100,000 or 50% of all account balances; criminal penalties may also apply.
One problem is that the “basics” seem fairly straight-forward: FBARs are due April 15th with an automatic 6-month extension; they must be filed electronically on FinCEN Form 114; and reporting applies to U.S. persons who have a financial interest in, or signature or other authority over, foreign financial accounts that have an aggregate value exceeding $10,000 at any time during the calendar year.
But the devil is in the details. Who/what is a U.S. person? What types of accounts qualify, and which are exempted? What characteristics do these accounts have in common? What is ownership? How is value calculated and when? What about cryptocurrency held in foreign exchanges? What about foreign owned real estate? Foreign mutual funds? Foreign trust accounts? What are the indirect ownership rules? Can I consolidate my FBARs? And on and on…
Some good news. There is a six-year statute of limitations applicable to FBARs and non-filers (“look-back” is only 6 years). There is also relief for those taxpayers delinquent with their FBAR obligations. There are several paths to compliance – noisy and quiet disclosures (see our Blog posts: here, here, and here). A non-filer has a good opportunity for penalty relief if he or she is (1) not under IRS examination (or criminal investigation) and (2) has not been contacted by the IRS about missing FBARs.
There are 2 keys to success. (1) Report your “disclosed” foreign account information precisely and accurately; and (2) draft the right “statement” of circumstances. With late FBAR filings, the IRS requires non-filers to submit a “statement” explaining the reasons for their non-compliance. Use extreme caution with your statement. A misstep here can be very costly and take your case in a direction you did not intend. It is highly advisable to seek experienced professional help with all FBAR matters. We have that experience and if we can be of assistance, please contact us – we are here to help.
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