Unlike some foreign reporting requirements, there is actually a time limit in which the IRS has to assess either willful or non-willful FBAR penalties for failure to file. The bad news — FBAR penalties are a fairly horrific ordeal.
Failure to File an FBAR Penalty Statute of Limitations
If you fail to file an FBAR, the FBAR penalty statute of limitations on assessments (or "FBAR ASED" in IRS-speak where ASED = assessment statute expiration date), is 6 years from the date on which the FBAR (now FinCEN Form 114) was originally due. From IRM 184.108.40.206.1:
The IRM gives this example:
"In calendar year 2013, a foreign bank account owned by a U.S. person exceeds $10,000.00. The Report of Foreign Bank and Financial Accounts (FinCEN Form 114) was due on June 30, 2014, but the account holder does not file one. The assessment statute of limitations for failing to file an FBAR report expires June 30, 2020."
**Note, as of 2017, the FBAR due date is no longer June 30th. It is now due when your tax return is due.
So let's use today's more relevant dates for another example: on July 1, 2015, the IRS can not assess any willful or non-willful failure to file FBAR penalties for a 2008 FBAR. That is, the 2008 FBAR was due June 30, 2009. Add six years, and voila — FBAR penalty fears are gone! Right? Well…let's talk about the other kind of FBAR Penalty out there — the failure to keep records.
Failure to keep records FBAR Penalty Statute of Limitations
The Bank Secrecy Act of 1970, the authorizing law for the FBAR requirements, also places an affirmative duty on account holders to hang on to records. According to the IRM, the ASED on FBAR Penalties for Failure to maintain required records (either willful or non-willful) is 6 years from the date the IRS first asks for the records.
Let's take a look at the example the IRM gives:
Same facts above — In calendar year 2013, a foreign bank account owned by a U.S. person exceeds $10,000.00. The Report of Foreign Bank and Financial Accounts (FinCEN Form 114) was due June 30, 2014, but the account holder does not file one. In addition, the account holder failed to maintain required records. An examiner requested the records on March 1, 2015 (emphasis added). The assessment statute of limitations for failing to maintain required records expires on March 1, 2021.
Now in this example, you see how the statute of limitations on assessment only changes from June 30, 2020, to March 1, 2021. Not a big deal. But now, let's use some relevant dates today. Let's suppose you did not file a FBAR for 2008. And you never kept records, heck you never had any real records. And you closed your account at the end of 2008. So now you are anxiously awaiting that July 1, 2015, when you can rest easy and never have to worry about FBAR penalties again. Right?
Well look at the IRM. It claims the ASED is 6 years from when the IRS first asks for the records. Well what if an IRS Examiner asks for your records on your 2008 FBAR on July 1, 2015? Does the IRS have forever to ask you for your records about your foreign accounts? Can they? Would that extend your 2008 FBAR to ASED to July 1, 2021? No. Interestingly, your FBAR record-keeping requirement is only 5 years from the original due date for filing the FBAR (IRM 220.127.116.11.2.3).
What you need to know about FBAR Penalty Statute of Limitations on Assessments
We know there are many people out there trying to wait out the game. Here's the real risk: the IRS has a mountain of data they collected from the tens of thousands of US taxpayers who have made voluntary disclosures. Their OVDP examiners are getting better and more efficient. They cannot process all of this data, and more and more data is being collected every day.
They will start going around to bankers, attorneys, CPAs, financial advisers whose names keep "popping up" on submitted voluntary disclosures. And when the IRS — either the Criminal Investigation Division or an Offshore examiner — visits, you can rest assured that the person who they are interviewing will be inclined to pin the blame on either "seeing dead people" or, more likely, the accounts holders he or she advised so as to save their skin from life-altering prison sentences.
Also, there are many reporting requirements for US-controlled foreign corporations, Foreign-controlled US corporations, foreign partnerships, trusts, gifts, that if you fail to file, the ASED on those penalties hasn't even begun to run, and the ASED on tax deficiencies created by those entities hasn't even begun to run. So even if the IRS doesn't come after you in time to assess FBAR penalties, there are still other sizable penalties it could impose.
It's difficult to wait out an uncomfortable movie in an uncomfortable theater where the film has yet to be even threaded into the projector. And this may be why one of the reasons using one of the Voluntary Disclosure programs is a more apt choice. If you need assistance deciding if you should enter into a disclosure program, contact us. We can help.