There are millions of Americans with unreported offshore accounts. Millions? Yes, millions. Unfortunately, many will soon be receiving huge tax bills from the IRS for not filing FBAR forms and reporting their foreign financial assets.
For many folks, mention offshore bank accounts and the first thoughts are of wealthy businessmen hiding money in secret numbered Swiss accounts. That still occurs but those folks are in the minority. Today, there are millions of Americans living abroad, Americans with foreign business interests, dual nationals, foreign born Americans and green card holders. All have legitimate reason to keep or open foreign accounts.
If you have foreign accounts and the aggregate balance of those accounts exceeds $10,000 (even if for just one day), the IRS says you must file a Report of Foreign Bank and Financial Accounts or FBAR form. Foreign accounts should also be disclosed on Schedule B of individual income tax returns as well. FBARs must be filed annually.
Failure to file an FBAR gives rise to IRS penalties. For some, the penalty may only be a $10,000 one time event or even a warning letter. Unfortunately, if the IRS believes the failure to file an FBAR was willful, the penalties are huge. How large? Treasury regulations say the penalties are up to the greater of $100,000 or 50% of the highest account balance and can be imposed for each year an account isn’t properly reported.
So how does the IRS determine what is a “willful” failure to file an FBAR? Great question. The Internal Revenue Manual used by IRS agents lists 21 criteria. Those criteria can be found in section 220.127.116.11.5.4 of the manual. They include:
- Whether or not any income from the accounts was properly reported on the account
- Whether or not the taxpayer properly completed Schedule B of the return and disclosed the accounts
- Copies of the foreign account statements (having accounts in a nominee name or having the statements sent offshore when the taxpayer lives in the United States are huge red flags)
- Agent’s interview with the taxpayer (Don’t go alone!)
- “Any documents that would support fraud.”
- Interview with the taxpayer’s return preparer (There is no accountant – client privilege.)
- Monies sent overseas were the result of criminal proceeds
- Promotional materials from the offshore bank or trust promoter
- Use of debit or credit cards to repatriate the funds (agents look to see if money is being repatriated through debit cards or if the foreign card accounts have higher fees than similar cards in the U.S.)
- Prior FBAR filings
- Old tax returns (agents look for significant, unexplained drops in income in the years after the foreign account is established)
- Prior audit results and warning letters
- Income to account reconciliations (determines whether unreported income is being used to fund foreign accounts)
- Taxpayer’s written explanation as to why an FBAR wasn’t filed
If you have an unreported foreign account, seek professional assistance from a tax lawyer, CPA or expat tax service. Not all tax professionals specialize in offshore reporting – few do – so make sure you are receiving qualified help. Once you are in compliance, future compliance is easy and very inexpensive. Ignore FBAR filings, however, and things can get very expensive.