Imagine moving to the United States 20 years. As a recent college graduate with a degree in computer science, you begin a successful career in the U.S. Every year you take some of your income and send it “home.” Over the years, you build up a nice savings account of $250,000. A couple years ago you learned that foreign accounts must be reported to the IRS each year but you never bothered filing.
This is a familiar story, one we hear daily. Unfortunately, under new IRS FBAR penalty guidelines, the penalty for not reporting your foreign account could be $250,000. That’s right, the IRS can take the entire account.
FBAR Filing Guidelines
Foreign or “offshore” accounts must be reported if their aggregate value exceeds $10,000 (U.S. dollar equivalent) at anytime during the year. Reporting is done on schedule B of one’s income tax return and on a Report of Foreign Bank and Financial Accounts (FBAR). Bank accounts, certificates of deposit, precious metal accounts, certain life insurance policies and brokerage accounts – they all must be reported if the aggregate value exceeds $10,000.
FBAR have been required since the early 1970’s but compliance was quite spotty. Post 9/11, the government ramped up enforcement and the penalties.
Technically, the penalties for a nonwillful violation are $10,000 per account per each year an account was not reported. The IRS can go back 6 years. For willful violations – and the IRS’ standard for declaring a violation “willful” is quite low – the penalty is up to the greater of $100,000 or 50% of the account balance per account per year.
That’s the legal maximum. Like watching the TV news when a reporter says that a criminal defendant is facing 300 years in prison, the maximums are rarely imposed. That’s the good news.
The bad news is that the customary IRS FBAR penalties are still outrageous. When it comes to unreported offshore accounts, the IRS simply can’t be ignored. With the imposition of FATCA reporting on banks and a worldwide push for tax transparency, ignoring the IRS no longer works.
What are the standard penalties?
For a non-willful violation, the standard IRS penalty is $10,000 per year. If you have multiple accounts, the default is still just $10,000 per year. Under new guidelines, the IRS can impose a one time $10,000 penalty regardless of the number of accounts and years in which no FBAR was filed. Of course, the corollary is also true, depending on the totality of facts and circumstances, the IRS can impose $10,000 per year per account.
What about willful violations? That’s where things really begin to hurt. The default is a one time 50% penalty based on the highest historical balance.
Before we go further, let’s look at the term “highest historical balance.” Many taxpayers move their accounts to the United States when they read that the IRS is sniffing around their bank. By the time the IRS sends an audit notice, their foreign account balances are under $10,000 or are zero. It seems like a foolproof strategy — simply wait for the IRS to catch on and move your money to the U.S. or another bank.
It doesn’t work.
Not only doesn’t that strategy work, if the IRS thinks you moved your money to a different bank simply to avoid getting caught you become a prime candidate for criminal prosecution. The willful failure to file FBAR forms not only carries huge civil penalties it is also a felony punishable by 5 years in prison.
In a recent case, the IRS elected to assess a taxpayer with penalties of 150% of his account value! Imagine having to pay $375,000 because you failed to report an account worth $250,000. We believe that such penalties violate the Eighth Amendment to the U.S. Constitution.
Even though Congress authorized the high penalties, the IRS is still subject to the Constitution. Sensitive to the “excessive fines” clause of the Constitution, the IRS has issued guidance that the maximum penalty should be 100% of the account balance.
Remember that the IRS can look back 6 years. Moving your money today doesn’t get you out of the penalty box.
By now, some readers are really worried. You should be. The IRS has become extremely aggressive in finding unreported offshore accounts. In the last few years, over 50,000 taxpayers have been caught or came forward and filed missing FBARs.
FBAR Amnesty Options
The IRS offers an amnesty program for most taxpayers. We say “most” because if you are already under audit or if the IRS issued a subpoena to your bank it is probably too late for amnesty. Called the Offshore Voluntary Disclosure Program (OVDP), the IRS offers reduced penalties for those who come forward voluntarily. There is also a streamlined program that offers even greater savings. For those that are even braver and are certain they can prove their innocence “(non-willfulness” in IRS parlance) there are opt out options.
The point of this post is simple. You will be caught if you do nothing and the price for doing nothing is extreme. If you have missing FBAR forms, speak with a qualified tax lawyer. Learn your responsibilities and your options.
Need more information? Our FBAR and offshore reporting services are offered worldwide. Most services can be handled for a flat fee. Our initial consultations are always free and without obligation. Even if you don’t hire us, your call is protected by the attorney – client privilege and kept strictly confidential.
MahanyLaw – America’s FBAR Lawyers