There was a time when you could get away without filing an FBAR and have zero consequences
The FBAR filing requirment began with the Bank Secrecy Act of 1970. Yet for decades, the FBAR considered a joke, if it was considered at all. Very few FBARs were filed. Why? Well the FBAR form is not an IRS form. It is a Financial Crimes Enforcement Network (FinCEN) form. Like the IRS, FinCEN is a division of the US Treasury, yet unlike the IRS it didn't have the resources to bother adminstering the form. That changed as authority to assess FBAR penalties fell to the IRS, and additonally, once the IRS realized they could use the FBAR as a ruinous form of punishment for those with unreported foreign accounts.
In the last ten years, this all changed. FBAR penalties are now a key IRS focus, and something its agents are quite happy to impose.
What exactly is an FBAR?
The FBAR is the Report of Foreign Bank Accounts. FBAR is also known as FinCEN Form 114. A person or entity is required to file an FBAR if they have a financial interest in or signature authority over at least one type of foreign financial account that exceeds an aggregate value of $10,000 at any time during the year. FBAR reporting is not limited to foreign bank accounts. Pensions, life insurance policies, and accounts that earn no money have to be reported.
But it it possible to still no file an FBAR and get away with it?
It might be possible to avoid ever getting caught if you dont' file and FBAR, but here are some key points to consider.
- If you ever filed an FBAR, you are now in the FinCEN database. Once you are in a database, you can be tracked.
- People who don’t comply with the reporting obligation and don’t risk consequences are people who don’t get caught. Civil penalties can reach up to 50% of account value. And the IRS only needs to catch you once. IRS tax examiners will ask a person about FBARs. If a person doesn’t answer honestly, he will face civil and criminal penalties. However, answering honestly will have consequences too. Failing to learn about foreign account reporting requirements can be evidence of “willful blindness.” See Internal Revenue Manual, 126.96.36.199.5.3, Paragraph 6.
- The DOJ also investigates people for criminal charges related to FBAR non-compliance. Criminal penalties for FBAR violations are frightening, including a fine of up to $250,000 of account value, and 5 years of imprisonment. If the FBAR violation occurs while violating another law the penalties are increased to $500,000 in fines and/or 10 years of imprisonment.
- People who have grievances against you are often very willing to offer testimony to the government. If you are not going to file an FBAR form, be confident that the people aware of your reporting obligation won’t offer testimony to the government.
- Income and assets can be attached to pay outstanding FBAR penalties. If you have no income or assets that can be attached, you may be able to avoid collection. However, in some jurisdictions, the IRS may be able to seize part of your spouse’s assets to pay your bill. It is difficult for the IRS to collect FBAR penalties if you live overseas.
- All claims that FBAR penalties violate the "excessive fines" clause of the 8th Amendment have failed. This is not to say that the 8th Amendment shouldn't protect people from outrageous FBAR penalties, it is just the the courts continue to ignore provisions of the Constituion that limit government power. We expect this to continue.
- The statute of limitations on assessing for FBAR penalties is 6 years. However, after six years, the IRS may still be able to penalize you for other unfiled foreign reporting forms like Form 5471 or Form 8938. These penalties can be assessed for multiple years, and unlike FBARs, there is no statute of limitations on these types of penalties.
A person’s best option is to file an FBAR correctly and get into a proper offshore disclosure plan — but only if necessary. Not everyone with unfiled FBARs needs a disclosure program. However, there are three things to consider that may take the sting away from this compliance regime:
- The FBAR intel is low value to the government. By filing an FBAR, you’re merely bogging down government bureaucracy.
- There is no such thing as an FBAR initiated audit. No one looks at an FBAR unless a tax audit is initiated. Don’t think that filing an FBAR is a red flag to get you audited.
- If you are going to “come clean” with the IRS do it right or don’t do it at all. Lying to the IRS or doing a half-cocked job will often make things worse.
If you have serious FBAR issues and concerns, contact us now.