The FBAR and FBAR penalties
FBAR stands for Foreign Bank Account Report and is a reporting requirement for certain foreign financial accounts.
The penalties for failing to file an FBAR are no joke. The IRS can apply a $10,000 penalty for each non-willful violation of the filing requirement. If a person willfully fails to file an FBAR, the IRS can apply a penalty equal to the greater of $100,000 or 50 percent of the account’s highest balance. On top of that, criminal penalties for a willful failure to file can reach $250,000, 5 years in prison or both.
The law states that the IRS has six years to impose an FBAR penalty.
Common errors made on the FBAR
Mistake #1: Failure to file
We've dealt with so many clients who simply did not know that this reporting requirement existed. They filled out their tax return and went on with life as usual, not knowing that they had done something wrong. They weren't trying to hide money in some 'secret offshore account'.
Often times, when they find out about the FBAR and the associated penalties, they panic and decide to just 'wait it out' to see if the IRS catches them. We don't recommend this course of action because the difference in penalties between willful and non-willful is significant. Once you intentionally try to hide, you become willful.
We've also had clients who thought the FBAR was a one time filing requirement; not so. You must complete an FBAR for every year that you have the accounts.
Mistake #2: Misunderstanding the $10,000 filing threshold
You are required to fill out an FBAR if the highest reported balance of certain foreign accounts exceeds $10,000. Let me repeat the important part: the highest reported balance…NOT the year end balance!
The threshold is not determined on an account-by-account basis, it is the total combined value of all your accounts. So let's say you have a $3,000 IRA, and a $8,000 savings account. The total combined value is $11,000, so you do have to complete an FBAR for both accounts.
Mistake #3: Not including 'non bank-account' accounts
People sometimes assume that they only need to fill out an FBAR for bank accounts. That is incorrect. The following should also be reported if they meet the filing threshold:
- Pensions
- IRAs
- Trusts
- Life Insurance
- Mortgage Accounts
- Superannuations
- Non-Directly held accounts
- Accounts where you have POA or signatory authority
- Business accounts held by the business but you're the signatory authority on it
Mistake #4: Joint accounts, and spouses
Let's say your father puts your name on his account. Technically, the money is not yours, but he has set it up this way so you will inherit the money when he passes away. Even if the funds are not yours, you still need to fill out an FBAR since your name is on that account.
The spouse of someone who files an FBAR is not required to file a separate FBAR if the following conditions are met:
- All the financial accounts that the non-filing spouse is required to report are jointly owned with the filing spouse
- The filing spouse reports the jointly owned accounts on a timely filed FBAR electronically signed (PIN) in Item 44, and
- The filers have completed and signed Form 114a, "Record of Authorization to Electronically File FBAR’s"
If not, them both spouses need to file separate FBARs stating the entire value of the jointly owned accounts.
Mistake #5: Minors have to file FBAR's
There is no age cut off for FBAR filing requirements. The FBAR instructions state:
"Generally, a child is responsible for filing his or her own FBAR. If a child cannot file his or her own FBAR for any reason, such as age, the child's parent, guardian or other legally responsible person must file it for the child."
So if your parents set up an account for your 3 year old child in a bank in India, an FBAR must be completed.
Amending errors
Let's say you realize you've made an error…can you go back to amend or file your FBAR? Yes. There are options.
We can assist you amend an FBAR you already submitted. If you did not file but realize you should have you can enter into one of the disclosure programs. Knowing which program to enter into can be confusing; there is the full OVDP (Offshore Voluntary Disclosure Program), the non-willful streamlined foreign program, and the non-willful domestic program.
If you need assistance filling out your FBAR, or if you have questions or concerns about misfiled or unfiled FBARs, contact us to schedule a complimentary, confidential consultation. Call us at 888-727-8796 or email info@irsmedic.com.
