Millions of taxpayers are now finding out that they should have been reporting their foreign bank accounts for years. Some do nothing and hope they won’t get caught, some seek legal assistance while others think a quiet disclosure will solve their problems. This post looks at the audit risks of the many folks who opt for a quiet disclosure.
To better understand these risks, some background is necessary. U.S. taxpayers that hold $10,000 or more in foreign financial assets must annually report those assets to the IRS. We use the term financial “assets” because the reporting goes well beyond bank accounts. Brokerage accounts, annuities, some pension plans, cash value life insurance and precious metal accounts may also have to be reported.
Reporting is done both on one’s income tax form (Schedule B) and on an FBAR form – Foreign Bank Account Report. Willful failure to file an FBAR can be a criminal offense and almost always carries huge civil penalties.
In an effort to avoid penalties, many taxpayers engage in what the IRS calls a quiet disclosure. Once they discover that they have an FBAR filing requirement, they either simply file the current year FBAR or send in several years worth of back FBARs. The hope is that the IRS will simply process the forms and the taxpayer will never here from the IRS again.
The IRS has said that quiet disclosures will result in penalties. They make their position clear both on their foreign reporting website and have told the Government Accounting Office they intend to so.
We are aware of several taxpayers that have told us they made a quiet disclosure and have yet to hear from the IRS. That doesn’t surprise us as it often takes the IRS several years to catch up. Unfortunately, we know many taxpayers that attempted the quiet disclosure route and are now facing huge penalty assessments.
How bad are the penalties? FBAR penalties can be up to the greater of $100,000 or 50% of the highest historical account balance. Although these penalties can be assessed for each year an FBAR was unfiled or late, the IRS generally imposes penalties for one year.
Remember that by making any type of disclosure you have provided the IRS with a road map of your assets. In essence, you have done their work for them. This isn’t to suggest that you shouldn’t come into compliance. Just the opposite is true. Taxpayers with unfilled FBARs should comply as quickly as possible. We recommend that you use the “front door” and seek professional assistance instead of trying to sneak in the back door with a quiet disclosure.
Have an unreported foreign account? If this is the first year holding the account, you or your tax preparer can electronically file an FBAR. Have more than one year of unfilled FBARs? Seek an experienced tax lawyer, CPA or expat tax service.
The FBAR lawyers at Mahany & Ertl concentrate in offshore IRS reporting. From FATCA to FBARs, we can help. For more information contact attorney Bethany Canfield at or by telephone at (414)223-0464. All inquiries protected by the attorney client privilege.