U.S. taxpayers are required to report offshore financial holdings when the aggregate balance of those assets exceeds $10,000. Even if your foreign brokerage account exceeds $10,000 in value for just 1 day, federal law requires the account be reported on a Report of Foreign Bank and Financial Accounts – FBAR for short. The FBAR penalties for failing to file can be huge – sometimes involving prison and civil penalties that exceed the value of the account.
Just how high are FBAR penalties?
Willful vs Non-Willful FBAR Penalties
A “non-willful” violation carries a civil penalty of up to $10,000. Non-willful FBAR violations are civil only. There is no risk of jail.
The price tag and risk really rises if the IRS determines the failure to file an FBAR is “willful.” That penalty is the greater of $100,000 or 50% of the highest balance in the account. These penalties can be imposed for each year an account was unreported. In addition, the IRS can refer willful failure to file FBAR casess to the Justice Department. A criminal violation carries a possible sentence of up to $250,000 or 5 years in prison or both. In certain circumstances where other violations are present, the maximum sentence can be enhanced to $500,000 or 10 years or both. (Click here for the IRS statute on civil FBAR penalties.)
There is obviously a huge difference between willful and non-willful FBAR penalties. So how does the IRS define “willful”?
The statute is silent but there is plenty of guidance from the IRS. Prior rulings and court cases suggest the following things could trigger a “willful” determination by the IRS:
* Checking the “NO” box on Schedule B of the Individual Income Tax return that asks whether you have a foreign account. The current 2012 Schedule B form asks, “At any time during 2012, did you have a financial interest in or signature authority over, a financial account located in a foreign country.”
* Maintaing an account in a known “tax haven.” Although the IRS takes a dim view of Swiss accounts, for example, merely having an account in a tax haven is usually not enough by itself.
* Creating a nominee entity such as a trust, International Business Company (IBC) or foreign corporation with no apparent legitimate business purpose.
* Moving your account or closing it once the bank or institution is perceived to be under investigation.
Doing any of the above can set you up for the much greater “willful” FBAR penalties and may also result in criminal tax charges. The creation of nominee entities and moving money simply to stay one step ahead of the IRS are especially risky moves.
If you have more than one year of unfiled FBARs, you should speak with an experienced FBAR lawyer immediately. The penalties for non-compliance are simply too great to try and navigate these dangerous waters alone.
The IRS offers several amnesty and other programs that can lower penalties. In many instances taxpayers can go through a traditional disclosure and see all or most of the penalties abated.
For more information and a no cost review of your options, contact us today. Our team of FBAR attorneys have helped taxpayers across the world. We usually offer flat fees for our services. Because we handle so many of these cases, we can perform our services for much less cost than many other tax lawyers.
Post by Brian Mahany, Esq.